Question of the Day: What Happens When Interest Rates Go Up?

The term “interest rate” gets bandied about quite often in the financial media and yet few take a moment to think about how interest rates impact business/markets/consumers.  Challenge your students to come up with at least 11 ways that interest rates filter through the economy and see how the do!

This list below comes courtesy of John Lancaster, who has written How To Speak Money, a book that deciphers financial lexicon:

The reason interest rates matter so much is because the interest rate is the cost of money at any given moment. It’s also the rate at which it is possible to invest risk-free, because you can buy a government bond at the prevalent interest rate, and it’s guaranteed to pay you back. This means that when interest rates go up:

1. life is harder for businesses, because money is more expensive, and

2. people will tend not to invest in companies, preferring to invest in risk-free bonds, and

3. the stock market will fall for that reason, so

4. confidence in general will fall. In addition,

5. people with mortgages will find it harder to make their repayments, and those who are coming off fixed-rate deals may suddenly have a dramatic increase in their monthly repayments. That means

6. mortgage defaults will rise, so

7. there will be downward pressure on house prices, and

8. some people will be in negative equity, which will stop them spending money. Also,

9. the currency will rise, because higher guaranteed rates of investment will attract money into buying the country’s debt, so

10. life will become harder for manufacturing businesses, because their exports will be more expensive. Not only that, but

11. inflation will fall – remember, inflation means money is worth less, whereas a rise in interest rates means money is more expensive.

There’s more, too, but these 11 things are a starting point for all the things that are completely taken for granted by people who speak money when they hear “interest rates”.