- Publication date: 09/22/2022 – 09:47:30 PM
The Federal Reserve (the US central bank) raised the interest rate by 75 basis points to the range of 3 and 3.25% yesterday, Wednesday, and hinted at more large increases this year, as part of new expectations that show its aim to raise the interest rate to 4.40% by the end of the year before reaching it. To 4.60% in 2023 to curb inflation, and the Gulf central banks tracked the impact of the US Federal Reserve in raising interest rates.
The Open Market Operations Committee of the Central Bank of Jordan decided to raise interest rates on all monetary policy instruments of the bank by 75 basis points, as of Sunday 25/9/2022.
How does raising the interest rate curb inflation?
Inflation is a global phenomenon exacerbated by the Russian-Ukrainian war and the disruption of global supply chains after the “Covid-19” closures in China, and to combat it other central banks in the world are taking similar measures.
The updated forecasts indicate that the Fed is ready to fight a long battle to curb the highest inflation wave since the 1980s, which is believed to at least push the economy to the brink of recession.
Raising the interest rate may be the most important monetary tool for all central banks to curb inflation, but it may not always hit.
In theory, the rule says that the decision to raise the interest rate increases the burden of new and existing loans, which means that bank customers will think more than once before taking on the borrowing.
This is due to the fact that the banks will increase the interest rate for those wishing to borrow, which means that they (bank clients) may take a decision to postpone borrowing until it falls.
The decision to postpone will result in several things, including:
It may be a reason to withdraw from purchasing a good or service, expand an existing project or open a new one.
It will slow down the hiring process.
In the end, the cash flow and consumption will be less, and the goal of the decision to raise the interest rate remains to absorb cash from the market to slow consumption, which is the first way to reduce inflation in any economy.
Also, raising the interest rate will push in the direction of transferring liquidity to banks in the form of deposits, in return for which their owners receive high interests from banks as an investment tool, and here the central bank succeeds in withdrawing liquidity from the markets.
How does the interest rate affect the economy?
In short, when the interest rate is raised, it leads to:
Immediate decline in demand for borrowing.
On the other hand, the demand for depositing funds increases.
These things may slow economic growth rates.
The pace of investment slowed.
Decreased spending of all kinds.
Direct impact on the productive sectors and the labor market.
Financial markets affected.
Stock markets affected.
How does raising the interest rate affect the average citizen?
For the ordinary citizen – in a simple way – raising the interest rate would lead to:
Increased borrowing costs from banks.
Pay more money for vital services.
Pay more for investment and car loans.
Pay more on mortgage.
Raising interest prompts depositors to deposit their money in banks as an investment tool to obtain high returns.
(Al Jazeera + agencies)