Demystifying the economy |  Who benefits from high interest rates?

Demystifying the economy | Who benefits from high interest rates?

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Other than savers, who benefits from high interest rates?

C. Rivet

To adequately answer this question, Press He called Nathalie Elgrally, a senior economist at the Montreal Economic Institute and a university professor.

“To identify who wins and who loses with high interest rates, we can first distinguish between two types of economic actors: lenders and borrowers,” said Ms.me Elgrably.

In general, lenders benefit from higher interest income on borrowed funds. However, your level of “profit” in a situation of rising interest rates depends on your cost of accessing these funds and the capital available for these loans.


PHOTO PROVIDED BY THE ECONOMIC INSTITUTE OF MONTREAL

Nathalie Elgrally, Senior Economist at the Montreal Economic Institute and Professor of Economics at the University Level

For example, explains Nathalie Elgraably, banks will not necessarily make more “profit” on interest income with their lending to individuals and businesses if their cost of accessing interbank capital, particularly the key interest rate set by the Bank of Canada , is also higher.

Fewer loan applications

Furthermore, in a situation of rising interest rates, banks’ revenues and profits from their lending activities may stagnate or even decline if rising interest rates severely curb demand for loans among individuals and businesses.

In addition, it is among the most indebted borrowers that raising interest rates can be very costly in the short and medium term. A priori in the case of variable rate loans, and those whose renewal is imminent at much higher interest rates.

The most indebted people and companies, whose net income is stagnant or declining, are especially vulnerable to the budgetary impact of the sharp rise in interest rates.

This vulnerability is beginning to manifest itself in the increasing number of insolvency cases that are being filed with financial and legal authorities these days.

savers

As for savers who could “benefit” from higher interest rates, economist Nathalie Elgraly cautions that it would be a mistake to assume from the outset that they will gain in terms of the net return on their savings.

Why ?

“To fully understand the rate of return on savings, and therefore the evolution of the purchasing power of savers, it is important to distinguish between the gross return based on the nominal interest rate and the net return based on real interest after the negative. impact of inflation,” says Mr.me Elgably, in discussion with Press.


The evolution of the purchasing power of savers is directly affected by the inflation rate, especially among people with stagnant or fixed income. Therefore, even if the interest rate on savings increases, savers do not “win” in terms of purchasing power protection as long as the inflation rate remains high.

Nathalie Elgrally, Senior Economist at the Montreal Economic Institute and Professor of Economics at the University Level

“The evolution of the purchasing power of savers is directly affected by the inflation rate, particularly among people with stagnant or fixed income. Consequently, even if the interest rate on savings increases, savers do not “win” in terms of purchasing power protection as long as the inflation rate remains high,” explains Nathalie Elgraably.

“These days, for example, with the inflation rate still around 6%, savers whose interest rate on their deposits would have increased by around 4% are still “losers” of around 2% per year with the evolution of your purchasing power. »

“Savings tax”

In a way, emphasizes M.me Unfortunately, inflation is the equivalent of a “savings tax” in the way it consumes and impoverishes the purchasing power of savers.

And this, despite the increased profitability of interest income from these savings, which is actually the result of a monetary policy decision by the Bank of Canada, which aims to reduce inflation by raising the cost of credit to curb demand. of goods and services in the economy.

“The most obvious current example of the impact of this restrictive monetary policy can be seen in the residential real estate market”, concludes Nathalie Elgraly.

“The sharp rise in mortgage interest rates since the beginning of the year has caused the number and average price of transactions to fall from the overheated levels of just a few months ago. »

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