The Impact of Rising Interest Rates on the Global Economy

Rising interest rates affect various aspects of the global economy. When central banks increase interest rates in response to inflation or strengthen a currency, the impact can be felt around the world, from capital markets to borrowing costs. One of the biggest impacts is on the lending market. With higher interest rates, borrowing costs also increase. Individuals and businesses tend to delay large purchases or new investments, which can slow economic growth. For example, when interest rates rise, the housing sector is often one of the most affected, because people prefer to postpone buying a house rather than have to pay higher interest rates. The impact has now also spread to the stock market. Investors will look for assets that provide higher returns, so they may sell shares to invest in more profitable instruments, such as bonds. This often causes share values ​​to fall and increases volatility in the market. Therefore, investors need to develop a more careful strategy, especially in determining their portfolio. An increase in interest rates can lead to strengthening of the local currency. This happens because more foreign investors are likely to invest in financial instruments in the country, given the higher yields. However, a strengthening currency can also make exports more expensive and reduce the competitiveness of certain products in international markets. At the international level, developing countries often feel the impact more severely from rising interest rates. Many of these countries depend on foreign loans in the form of US dollar-denominated debt. As US interest rates rise, the cost of servicing debt increases, potentially causing a debt crisis in those countries. This could also lead to a reduction in foreign investment, as investors prefer countries with lower interest rates. On the other hand, some sectors, such as banking, could benefit from rising interest rates. Banks tend to benefit from higher interest margins when borrowing costs rise, which can add to their earnings. Higher interest rates can also influence fiscal policy decisions. The government may need to adjust spending to maintain economic growth. This can have an impact on social programs and infrastructure, which in the long term can affect the welfare of society. Another global aspect is the impact on inflation. In response to high interest rates, consumption may decline, which could ultimately help control inflation. However, inflation control must be carried out carefully so as not to disrupt economic growth. Uncertainty caused by interest rate fluctuations can affect consumer and business confidence. When consumers feel pessimistic about the state of the economy, personal spending will decrease, which has the potential to make the economic slowdown cycle even worse. Rising interest rates also tend to influence companies’ investment decisions. Companies may become more selective in selecting projects, which could reduce innovation and long-term growth. These things underscore how interconnected the global economy is. An increase in interest rates in one country can trigger a chain reaction that affects other countries. Therefore, stakeholders must be prepared to face changes that may occur, in order to maintain economic stability and growth in this challenging era.