When Interest Rates Rise, What Happens to Your Money?
- •Interest rate = the price of borrowing money
- •When it rises, deposit yields and loan costs both rise
- •It is usually raised to cool inflation
What an interest rate is
An interest rate is the price of borrowing money — what you pay to borrow, and what you earn to lend. The central bank's policy rate is the base for rates across the market. When it rises, borrowing gets more expensive; when it falls, cheaper. That one change ripples widely — into deposits, loans, investing, and prices.
What happens when it rises
When rates rise, deposit yields go up, which helps savers. But loan rates rise too, so anyone on a variable-rate mortgage pays more each month. Company investment and consumer spending cool, and stocks and real estate generally face a headwind.
| Item | When rates rise |
|---|---|
| Deposit yield | Rises |
| Loan interest | Rises, heavier repayment |
| Stocks | Generally under pressure |
| Prices | Aimed at cooling |
Why rates go up and down
When prices rise too fast (inflation), the central bank raises rates to slow money circulation and cool prices. When the economy cools, it cuts rates to loosen money and revive it. Knowing which way rates push your money lets you prepare — for instance, by reviewing a variable-rate loan.
Frequently Asked Questions
Is the policy rate the same as my loan rate?
No. Your loan rate is the policy rate plus the bank's margin. But when the policy rate rises, your rate generally rises with it.
Variable or fixed rate — which is better?
If rates look set to rise, fixed helps; if to fall, variable. But since direction is hard to predict, decide by weighing your own situation and what you can bear.
When rates rise, is a deposit always the answer?
For money you will use soon, it is a good choice. But parking all your long-term money in deposits can miss long-term growth. Split by time horizon.
Do rates and stocks always move opposite?
Rising rates are generally a headwind for stocks, but they do not always move opposite. Earnings, the economy, and sentiment all act together.
I have a loan — what if rates rise?
On a variable rate, your monthly payment can rise. Consider prepaying part with spare cash or switching to a fixed rate to ease the burden.