Raising Interest Rates in 2022

Raising Interest Rates in 2022

By definition, interest is the cost of borrowing money, that is usually given as an annual interest rate. It is a tool used by central banks to try and slow rising prices and inflation. The global economy is currently trying to bounce back from the pandemic, however, it is attempting to do so in a climate with soaring demand that is co-existing alongside supply shortages. Thus central banks and those responsible for currency and monetary policy are taking action.

Bobby Ward at Vorto Trading explores the year ahead and what we should expect to see in 2022 with regards to the economy, inflation and interest rates:

At the start of a new year, it is natural for investors and policymakers to make predictions regarding the economy and interest rates. Earlier this month, Bloomberg Business published that ‘central banks, not Covid19, will be the driving force behind global economies in 2022. The article goes on to explain that the biggest threat to the economy this year will stem from the consequences of inflation and the potential risk that policymakers could call the post-pandemic recovery wrong. 

Weforum recently shared an article detailing that the United Kingdom, Brazil, South Korea, and New Zealand were among the countries that raised interest rates in 2021. As we look ahead to 2022, America’s central bank, the Federal Reserve System, is expected to raise interest rates three times (CNBC).

At the same time, Time.com shared that Mortgage Rates will continue to rise in 2022. If we look back to last year, it was definitely one for the record books. In 2021, the average 30 years fixed mortgage rate reached 2.65%, which is an all-time record low. Simultaneously, inflation hit a record 39-year high. When it comes to mortgage rates in this climate, there is only one place for mortgage rates to go and that is up.

Alongside these increases, The European Central Bank, which is responsible for setting interest rates for all 19 European countries that use the euro currency, is set to scale back economic support. The FT confirms that the Bank of Japan will be following in the same footsteps as Europe.

So what are the implications of high-interest rates?

First and foremost it means changes to the way we spend and save money. For homeowners, this could mean that the cost of monthly repayments for mortgages could rise. Interest rates on credit cards, personal loans, and car loans could also rise. When it comes to saving in a climate of high-interest rates, people could potentially receive a better return for their money, which could see more people saving overspending.

The case against raising interest rates

There has been great concern in China for the rapid rise in interest rates in the US and Europe. The nation has highlighted concerns that this would ‘slam the brakes’ on the global recovery from Covid19. Instead, there is an argument that central banks should maintain the monetary stimulus, otherwise they risk grave economic consequences including negative spillovers. In such events, the global economy will be subject to challenges regarding global and economic-financial stability and it would be developing countries that would get the brunt of such consequences.

At the World Economic Forum’s Davos Agenda, the Chinese president, Xi Jinping gave a speech regarding the economic recovery. He stated that ‘while global inflation risks were emerging, policymakers should strengthen economic policy coordination and develop policies to prevent the world economy from dipping again’.

However, Forbes shared that China is not alone in its concern for raising interest rates, as others across Asia, Africa, and South America have expressed concerns for the US to accelerate interest rates 3 times in the next year whilst also rolling back its economic support efforts.

As we look towards the year ahead, investors and policymakers will be at a crossroads when it comes to interest rates and inflation, thus causing fund managers and investors conflict when it comes to their monetary policy stance. In this climate, investors will be looking to take steps to position their portfolios for a high-inflation environment. If you would like to know more about how increased interest rates can impact your business, contact Bobby Ward at [email protected].