Dubai: With interest rates now expected to not rise as much worldwide, should you be doing anything differently with your money? For instance, would you benefit if you partly invest your savings in a certain product now?
When the world’s largest economy, the US, this week slowed its rate hikes for the second time since the pandemic, why was such a move important for global markets and your investments? Let’s delve into this a bit further.
The latest rate rise wasn’t as aggressive compared to the rate hike in December. Before that, the Fed announced four similar-sized rate hikes in a row. The recent hike puts interest rates at the highest level in 15 years, and it’s warranted considering how high inflation has been running hot globally.
While the pace of adjustments is slowing, US signaled only a couple more rate hikes are remaining now, while adding that rates cuts are not to be expected in 2023 since the recent signs of slowing inflation are at an “early stage.”
Why so many rate hikes? How did it affect me?
For economies worldwide, there has been a prevalent threat of inflation re-accelerating and requiring even more of such drastic steps in the future, if central banks don’t keep reining in a surge in prices by making it more expensive for businesses and people to borrow money.
“The good news now is global inflation has meaningfully slowed since the last rate hike and consumers are beginning to spend less – suggesting that the world economy is playing out the way central banks had hoped,” explained Mohammad Shaan, a Dubai-based wealth manager.
“Up until now, the higher rate of interest meant borrowers paying even more interest on credit cards, loans and other types of variable-rate debt. But now it will slowly start to get cheaper for borrowers henceforth.”
Earlier, the higher cost of money meant a drop in your purchasing power, i.e. what you can afford to buy, but it also meant people started to spend less, and a drop in demand for goods and services.
Lower rates encourage borrowing and tend to increase money supply. For example, the lower the interest rate the lower the monthly mortgage payments on a newly purchased house.
Effects of higher interest rates will wane off now
Although higher interest rates mean that it’s more expensive to borrow money, which economists say should slow both big purchases and new hiring, recent economic data suggests the job market remains very strong in most key economies worldwide.
“Apart from a visibly strong job market, employees worldwide have started to witness salary hikes, but this leaves central banks facing a new problem, which is to navigate through what could imply a re-acceleration in growth and inflation as a result of a strong job market,” added Shaan.
As salaries rise, so will overall demand and pricing pressures in the global economy. The possibility of rising wages is one of the reasons why central banks are considered likely to take a cautious stance and avoid pulling its interest rate hikes back prematurely.
The good news now is global inflation has meaningfully slowed since the last rate hike and consumers are beginning to spend less
How can you benefit from slowing interest rates?
“Your investments can also benefit from lower interest rates. Since lower rates incentivise borrowing, businesses make investments in equipment, real estate, and other expansions that can help increase stock prices,” said Brody Dunn, an investment manager at a UAE-based asset advisory.
“On the other hand, lower interest rates tend to reduce returns on bonds. Depending on your asset allocation, lower interest rates could affect you positively or negatively.”
If you’ve been considering a large financial decision, such as buying a house, a home improvement project, or purchasing a car, a low interest rate can provide a better opportunity for a more favorable loan. Also, credit cards with variable rates tend to drop when the rates start to slow.
So, if you’re trying to catch up on credit card debt, lower rates can provide a little help. If you already have a loan, lower interest rates might mean it is a good time to evaluate your current terms and consider refinancing or locking-in a fixed rate now, to avoid higher interest rates in the future.
What else should you consider with lower interest rates?
“While borrowing may provide better terms when interest rates are low, it’s still wise to be cautious. In contrast, some areas that could offer lower rates of return when interest rates go down include savings accounts, deposits, bonds, and money market accounts,” added Dunn.
“While your savings account will be earning less interest when interest rates are low, it’s still important to keep saving. Especially if you haven’t built up an emergency fund, you’ll want to save in the case of an unexpected major event.”
However, realistically, financial planners often reiterate that for most people, if you have an established savings plan and financial goals, a lower interest rate will most likely not be a significant reason to materially change your saving strategy.