21 January 2025
How high should interest rates be? And what difference does it make?
High interest rates too high = high cost of borrowings = lower business investment and expansion = slow growth and higher unemployment.
High interest rates too low = people and businesses borrow and spend more = higher inflation.
In the USA, interest rates were between 1.5% and 2% before COVID - 2017 to 2019. When COVID hit in 2020, the interest rates were dropped to almost zero.
Very low interest rates encouraged more borrowing and spending, which grew the economy. Inflation also started to rise.
To keep inflation in check, the Federal Reserve increased rates to over 4% from 2022 to 2024.
Similar patterns took place in Australia, New Zealand, the UK and Canada
In South Africa, rates were 6.5% before COVID, dropping to under 4% during the pandemic. Rates have since risen to between 7% and 8%.
Where will rates go in 2025?
Source interest rates: data.bis.org