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The impact of rising interest rates on inflation and our personal finances

The key rate is the percentage of interest charged by a country’s central bank on loans to commercial banks. Its variation has a major impact on consumers’ purchasing power. This is why it is generally used to control inflation. We explain everything.

Taux directeur et taux d’intérêt appliqués par les banques commerciales

From the definition of the key interest rate given above, we can see that commercial banks have to pay higher interest when borrowing money from the Central Bank when the key interest rate rises. As a result, interest rates on loans granted to individuals and businesses by these financial institutions are also on the rise.

What’s more, the latter often impose stricter conditions on the granting of credit in these circumstances. On the other hand, raising the key interest rate can have a positive impact on our economies, since it also leads commercial banks to raise interest rates on term deposits and savings.

Taux d’intérêt appliqués par les banques commerciales et finances des particuliers

In short, it becomes more difficult to obtain loans from commercial banks when the key interest rate rises. This leads individual customers, and even businesses, to consider other solutions for managing their finances: they consume and invest less. In addition, those with outstanding loans have to cope with rising monthly repayments by cutting back on their spending. Thus, the increase in the key interest rate is a major factor in the decline in consumer purchasing power.

Baisse du pouvoir d’achat des consommateurs et inflation

·      Inflation : définition

Simply put, inflation is the overall rise in the price of goods and services in a country over a defined period. In most cases, it indicates a fall in the value of a currency. To control it, the Central Bank can implement several policies, the best known of which is manipulating the key interest rate.

·      Inflation : le lien avec le pouvoir d’achat du consommateur

In the most common scenarios, inflation leads to a significant drop in consumer purchasing power. But the reverse is also true. We’ll tell you why.

  1. Les consommateurs achètent moins de biens et de services lorsque leur pouvoir d’achat diminue. Et dans ce cas précis, cela est principalement dû à l’augmentation du taux d’intérêt des prêts donc le crédit n’est pas une solution envisageable.
  2. La demande en biens et en services sur le marché connaît alors une baisse considérable.
  3. C’est ainsi que les prix baissent et se stabilisent. C’est la diminution de l’inflation.

Conclusion

So, in summary, here’s the impact of the increase in the key interest rate on our finances as individuals and on inflation:

  • Baisse du pouvoir d’achat des consommateurs à cause de l’augmentation du taux d’intérêt pour les crédits ;
  • A terme, diminution de l’inflation ;
  • Augmentation des taux d’intérêt pour les épargnes et les dépôts à terme.

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