Increasing interest rates. Bad news or good news?

Many people fear interest rates hike. Yet, many economists would tell you that increase in rates is not necessarily abad thing. If anything, it may even be signifying a stronger economy. With regards to interest rates, there’s one article worth reading. Briefly, it’s here in TheStar. Even more briefly, it says of potential interest rate hikes in many countries in the world, including Malaysia. Wait, how can interest rate increase be a good news? Haha. It will affect borrowers, right? Then, if the borrowers are unable to pay, they will be in trouble and when they are in trouble, banks would be affected and stops lending. Without loans, it would be much harder to set up new businesses, no? Without new businesses, then no new jobs are created. The unemployment goes up and demand for property goes down. So, prices would go down as well, right? Okay, if it is this easy, then all the economists would not be needed anymore. 🙂  By the way, the only reason why the U.S. is increasing their rates or is saying that they will increase their rates is because their economy is growing, strongly. (according to the Federal Reserve based on available numbers) Here’s that article again. 

Well, generally, the interest rates are used by central banks to ensure the economy is moving in the direction that it should. Low interest rates are usually accommodative but should be adjusted accordingly so that the economy is moving but inflation is controlled.  Accommodative stance for interest rate. (As for me, I still think accommodative stance is good and we should just let the Fed increase their rates first. Let the adjustment to the currency value continue. Then, when we finally increase the rates later, it will be more beneficial.)  There are definitely benefits for higher rates.

1. Older folks and even savers get more from their savings.

2. Helps in containing inflation (real demand is encouraged instead of overspending)

3. Usually helps currency to be stronger (Ringgit remains undervalued as per trade numbers)

4. Helps people be more rational in their stock picks. (Instead of low dividends from stocks, people may prefer higher interest rate returns instead)

 

Disadvantages for increase in interest rates? 

1. People may think twice before buying a property. (Only applicable to those who are stretching themselves to the limit. Else, it should be still fine)

2. Potentially higher savings rate? (Arguable but usually will help a bit.)

3. House prices start to go down? If demand slows, naturally prices would soften. (Only for short term demand. Once people get used to the new rate, demand usually continues. Prices is however subjective lah)

 

My personal advice? Do not think too much about rates increase. We should focus on the reason for our loan application instead. Evaluate also what we actually buy because if a 1 percent rate increase is considered ‘too much,’ then something must be wrong with what we intend to invest in. Remember the financial crisis in 1997/98? Some ‘clever’ institution asked Malaysia to increase the rates tremendously and ‘kill off’ all the unhealthy companies. FYI, this is NOT the solution because no healthy company dealing with international trade can still operate if the currency suddenly loses 30 percent of your value… If their margin used to be 15%, they IMMEDIATELY swing into loss. Understand? Happy following.

written on 14 Dec 2017

Next suggested article:  200 percent profits in one year. Possible?

 

 

 

 

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