The US Federal Reserve repeated the term inflation more than 15 times in its report yesterday to raise interest rates by 75 basis points to a range of 1.50% to 1.75%.

Inflation has become a preoccupation for central banks, which since the first quarter of this year have declared a state of emergency in order to achieve consumer price targets in the markets.

But after two decisions by the US Federal Reserve to raise interest rates in March and last May, its efforts did not succeed in curbing inflation, which recorded 8.6% last May, the highest level since 1981.

And yesterday, Wednesday, the Fed decided to increase the dose of raising interest rates by 75 basis points, perhaps as a start to stop the rise in inflation, and start a downward journey during the third quarter of 2022.

How does raising the interest rate curb inflation?

This may be the most important monetary tool of all central banks to curb inflation, but it often hits and rarely disappoints.

Theoretically, the rule says: The decision to raise interest rates increases the burden of new and existing loans, which means that bank customers will think more than once before taking on the borrowing.

This is due to the fact that the banks will increase the interest rate for those wishing to borrow, which means that they (bank clients) may take a decision to postpone borrowing until interest rates drop.

This postponement decision will cause several things, the first of which is that it may be a reason for retracting the purchase of a good or service, expanding an existing project or opening a new one, and it will slow down employment operations, as a result, cash flow and consumption will be less.

The objective of the decision to raise interest rates is to reduce liquidity within the market to slow consumption, which is the first way to reduce inflation in any economy.

Raising the interest will also push in the direction of transferring liquidity to banks in the form of deposits, in return for which their owners receive high interests from banks as an investment tool, and here the central bank succeeds in withdrawing liquidity from the markets.

This is exactly what the US Federal Reserve, the Bank of England and soon the European Central Bank are doing as the most important tools to curb inflation that hit the global economy.


How does the interest rate affect the economy?

In short, when interest rates are raised, this leads to:

  • Immediate decline in demand for borrowing.

  •  On the other hand, the demand for depositing funds increased.

  • These things may slow economic growth rates.

  • The pace of investment slowed.

  • Decreased spending of all kinds.

  • Direct impact on the productive sectors and the labor market.

  • Financial markets affected.

  • Stock markets affected.

How does raising the interest rate affect the average citizen?

For the average citizen - in a simple way - raising interest rates would lead to:

  • Increased borrowing costs from banks.

  • Pay more money for services.

  •  Pay more for investment and car loans.

  •  Pay more on mortgages and not expire using credit cards.