Today we’re going to talk about interest rates.
At this moment in history, interest rates are at their lowest, they have never been lower.
By logic, something that goes down has to come back up, so what would happen in theory if interest rates were to go up again?

Let’s start putting the pieces in order.
Central banks of nation around the world have various tasks and one of them is to stabilize economic activity and promote the prosperity of their own nation within the global economic competition.
One of the central bank’s weapons is the control of interest rates, rates at which major banks lend money to smaller banks in what is called the overnight market.
This money will then be lent to other economic entities such as companies and individuals like yourself, at higher rates of course.
This flow of money allows companies to finance themselves and grow, people to buy a house by accessing a mortgage and small banks to be remunerated for lending money. The money so switch on the ‘economy, creating value and wealth.

In the U.S. for example, and in this case for their central bank the Fed, the interest rate that banks charge in these cases during overnight loans is called the Federal Funds Rate.
This is the rate you hear about when the media talk about rising rates on the various economic news programs.
As you can see these rates definitely have an impact on the companies and people around you.
These rates affect the lives of the people and they are the underlying of any loan from any bank.
They affect mortgages, lines of credit and even bonds.
They are an important metric to monitor and keep an eye on in an advanced economy such as the West.
In fact, in the 2008 economic crisis, the Fed lowered interest rates significantly to help the overall economy recover.
So lower rates for banks are reflected in lower rates for businesses and people.
Companies have lower costs for a certain period of time and allows to have more employees, who have a salary and then expenses, so they boost the economy.
As you can see is a phenomenon that we could call circular.
Now, logically, in the event of rising rates any person with any debt will spend more for their debt and in the case of a company we would have higher business expenses and necessary cuts to be made to possible staff.
Now, read in this way, it seems that the solution to all the ills of business is to keep rates at rock bottom levels, but it should be noted that central banks must try to keep the economy sustainable, avoiding to depress it with high rates or set it on fire with the printing of money.
A system overexcited by unlimited money printing and low rates creates problems in the long and medium term.
An economy with a strong growth momentum, we will see a large demand for goods and services from citizen users.
Since the production of goods and services cannot be increased overnight and more people employed means more money spent in the market, this will result in a price increase called inflation.
If we want to explain inflation in a simplistic way, it is as if the value of money decreases or even collapses, decreasing economic well-being and eroding household savings.
We actually experience some inflation every year as central banks try to have an inflation level of 2% per year.
Understand that 2% per year is bearable, a 100% per year or per month is destructive.
So, understanding this risk, by raising interest rates and making loans more expensive, they are trying to cool down the economy, trying to balance it as best they can and lower inflation
Obviously there are short-term costs, but better than having an inflation like the Venezuelan one.
In fact, in the event of a rate hike, the effects will be felt by investors and consumers alike.
Consumer debts will become more expensive, such as home and car loans for variable rates while fixed rates will remain the same.
For investors, usually when rates rise the stock market sees a weaker performance.
This is because high rates make the operations of companies more expensive, more costs less revenues and therefore lower expectations in the stock market.
Bond prices will probably fall as new issues will have higher yields and will be more attractive and also the yields of deposit accounts will grow.
This leads us to be particularly careful how we expose ourselves to debt, teaching us another parameter to keep an eye on.