Here’s how rising global interest rates could affect your life

This article was first published on 17 January 2022 and updated on 7 October 2022, 3 November 2022 and 16 March 2023.

Interest rates have been rising globally because of record-breaking inflation – and it means changes to the way we spend and save money.

Central banks around the world have responded to rapid inflation with rate rises across the world. The US central bank hiked interest rates by 0.25 percentage points in February, after making several 0.75 point rises last year. This has lifted rates from near zero in early 2022 to a range of 4.5-4.75%, their highest level since October 2007. The UK raised rates for the 10th month in a row in February. The increase of 0.5 percentage points pushed rates to 4%, which is their highest since 2008.

Reuters has described the US moves as the "fastest tightening of monetary policy" since the 1980s. And there could be more rises to come because of sudden fears of a banking crisis following the collapse in March 2023 of two mid-sized US lenders – Silicon Valley Bank and Signature Bank – and Swiss regulators having to step in to provide help to Credit Suisse following a slump in its share price.

But US rate rises do not only affect the US. Changes there have a knock-on effect around the world, as many countries that peg their currency to the dollar alter their rates in line with the US.

Interest is the cost of borrowing money, usually expressed as an annual interest rate. It is one of the main tools central banks can use to try and slow the pace of inflation.

Inflation has hit record highs in the past year following Russia's invasion of Ukraine, which reduced international supply of energy and food commodities, leading to big jumps in prices. Another contributing factor was soaring consumer demand coupled with supply shortages as the global economy bounced back from the pandemic.

But why do banks increase interest rates to try and tackle inflation? Put simply, it's because higher interest rates make it more expensive for people and companies to borrow money from banks.

You may ask why banks would want to add to people's expenses when they are already under pressure from inflation. Well, the intended effect of making borrowing more expensive is to reduce the amount of money in circulation – in other words, it will make people spend less or postpone planned purchases of expensive items such as cars.

This drop in spending should lower inflation because it will alter dynamics of supply and demand. For example, the price of energy and food commodities spiked following the outbreak of the Ukraine war because demand suddenly exceeded shrinking supply. But if the opposite happens and demand falls away, prices for goods will usually fall as the companies who sell those goods may lower prices to try and revive demand.

Higher interest rates mean people receive better returns on their savings. In New Zealand, for example, state-owned bank Kiwibank announced in October 2021 that savers would benefit from higher returns on a range of savings and term deposit rates – where money is locked away for an agreed length of time. This followed the first rate rise in New Zealand for seven years.

Sometimes higher savings rates can be slow to appear – if at all. “It can take a few months for savers to see rate rises passed on to them, but many may have only had 0.25% or even less passed on to them since December 2021," Rachel Springall of Moneyfacts told the i newspaper in June 2022.

But currently rates for products such as CDs have risen and are forecast to climb further, given expected Fed rate increases, says Kiplinger's, a personal finance magazine. Most depositors' accounts fall well within FDIC coverage limits, but those with excess monies could both protect their savings while taking advantage of higher rates for those products.

Here are some of the other main ways our finances are affected by rising interest rates.

If you take out a mortgage to buy your home in the UK, the cost of your monthly repayment may rise. The amount will depend on the size and the type of your loan.

In October 2022, the rate on a typical two-year fixed rate mortgage in the UK went past 6% for the first time in 14 years. While US mortgage rates have recently "pulled back," according to Freddie Mac, they are higher than a year ago. Today, a 30-year fixed-rate mortgage (FRM) averages 6.60% (data as of March 16, 2023). A year ago during that period, the 30-year FRM averaged 4.16%

If you have other borrowing, like credit cards, personal loans or car loans, the interest rate on these may rise, too. As rising inflation fuels the cost of living crisis, policymakers worldwide are worried about rising household debt globally, and the ability of consumers to pay back their debts.

Household debt in the US rose by $394 billion in the fourth quarter of 2022, taking it to a total of $16.9 trillion, according to the Federal Reserve Bank of New York, one of 12 Federal Reserve Banks in the US. Credit card balances have climbed by $61 billion to hit $986 billion, putting them above the pre-pandemic high of $927 billion.

By raising interest rates, central bankers hope to dampen consumer spending and slow rising inflation.