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In short, what does raising interest rates mean?

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The higher the interest rate set by the central bank, the higher the interest rate on existing and new loans will automatically be.

Unsurprisingly, the US Federal Reserve announced the hike in federal funds interest rates, in a meeting that was expected from the east to the west of the globe.

With the Fed’s announcement to raise interest rates by a quarter of a percentage point to a range of 0.25% – 0.50%, a question arises as to what it means to raise interest rates and what does it have to do with deposits denominated in dollars? and associated currencies.

What does raising interest rates mean?

Raising interest rates is a norm that determines the interest rates of the loans that the banks obtain from the Central Bank, so the banks set their plans for a new mechanism for calculating the interest rates of the loans that they grant to the clients.

The higher the interest rate set by the central bank, the higher the interest rate will automatically be on existing and new loans, in currencies denominated in or linked to the central currency.

In the case of the US dollar, the cost of borrowing will increase from today for banks and therefore for customers, and this is a negative indication for economies that seek to stimulate the markets by establishing low interest rates.

As the increase in the cost of loans will lead to a slowdown in the rate of requests for lines of credit in global markets, especially in the dollar and its related currencies.

What is the relationship of interest to deposits?

But the decision to raise interest rates has a relatively positive aspect for owners of bank deposits with banks that operate in the markets. The decision to raise interest rates also means that the depositor gets higher returns.

In other words, a depositor of dollars, for example, will have the opportunity to expand their deposits to obtain higher interest in exchange for depositing them in banks, due to the decision to raise interest rates.

In such cases, many markets are witnessing a rapid increase in customer deposits in the banking sectors, to take advantage of rising interest rates, in contrast, the availability of liquidity within the markets is decreasing.

This means that bank deposits have become one of the forms of investment for people and institutions, by depositing them in bank accounts and charging them monthly, quarterly or annual interest.

This is the meaning of curbing inflation by raising interest rates, reducing the size of the money supply within the markets, and consequently consumption and investment decline, and markets reprogram purchasing power based on available liquidity. .

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