Interest rates around the world have reached historic lows in recent years due to global economic uncertainty and the risk of deflation. However, with central banks now being urged to consider rate rises, financial markets are beginning to speculate about a possible return to more normal levels of interest periodically. In this article we will examine what is driving this call for rate rises, as well as the potential implications for the global economy.
What is Driving Rate Rise Speculation?
Central banks around the world have been broadly in agreement that it is now time to think about raising rates, especially as global economic conditions improve. This could be due to a number of factors. Here are some of the main ones:
• Signs of Improving Global Economic Conditions: It is becoming increasingly apparent that the global economy is starting to improve, with countries such as the US, UK and Japan all showing signs of improvement. This has led many central banks to believe that raising rates is the best way to ensure that this trend continues.
• Low Inflation: Low inflation is causing many central banks to consider raising rates as a way of stimulating economic growth. Low inflation acts as a disincentive for people to spend, thereby dragging down economic growth. Higher interest rates can help to combat this by incentivizing people to spend, rather than save.
• Currency Volatility: Currency volatility is another factor contributing to the call for rate rises. A more stable currency helps to keep inflation lower and also reinforces the credibility of a nation’s central bank.
• Market Expectations: Finally, there is a growing expectation among investors and financial markets that interest rates are likely to start going up soon. This expectation, combined with the other factors mentioned above, has caused many central banks to start thinking about rate rises.
Implications of Rate Rises
It is important to consider the potential implications of rate rises for the global economy. Here are some of the most important ones:
• Higher Interest Rates Could Slow Wage Growth: One of the key implications of rate rises is that they could slow down wage growth. As rates rise, it becomes more expensive for businesses to borrow money. This, in turn, can cause them to be less willing to increase wages, thereby reducing the amount of money being injected into the economy.
• Increased Risk of Deflation: Another potential implication of rate rises is that they could lead to an increased risk of deflation. If rates rise too quickly, borrowers may not be able to keep up with their repayments and this could lead to an increase in defaults. This, in turn, could lead to deflation as less money is being spent in the economy.
• Lower Investment Returns: Finally, rate rises can also lead to lower investment returns. As interest rates go up, the return on fixed-income investments such as bonds, certificates of deposit and so on will go down. This could lead some investors to shift their money into higher-risk investments that may yield higher returns.
Who Would Benefit From Rate Rises?
It is important to consider who would benefit from rate rises before any decisions are made. Here are some of the key beneficiaries:
• Banks and Financial Institutions: Banks and other financial institutions would benefit from rate rises as it would make it easier for them to make profits on their lending activities. They would also have more money available for loan for businesses and consumers.
• Savers: Savers would benefit from rate rises as it would mean that their savings accounts and other fixed-income investments would earn more interest. This would help to offset some of the losses incurred due to inflation.
• Government Revenues: Finally, governments would also benefit from rate rises as it would lead to an increase in the amount of taxes they could collect from savers and financial institutions. This would help to bolster their revenues and reduce the need for other forms of taxation.
It is clear that there are numerous considerations that must be taken into account before central banks start to raise rates. By carefully assessing the implications of such a move, central banks can ensure that any rate rises are carefully managed and do not create further economic instability. However, with signs of global economic improvement, it may be that rate rises are inevitable in the near future.
