Interest Rates Keep Rising: What Does It Mean For My Money And Stocks?

Rarely have the financial markets experienced such turbulent times. Big banks falter, share prices fluctuate dangerously. The interest rate decision by the American Federal Reserve was therefore eagerly awaited. Is she taking a break from interest rates to protect troubled banks? Answer: No, the Fed continues to fight inflation with a rate hike of 0.25 percentage points.

But what do higher interest rates actually mean for …

… my account?

The phase of interest rate hikes continues, that much is certain as of this week. In addition to the Americans, the Norwegians and Swiss have also raised their key interest rates. The ECB announced an increase of 0.5 percentage points just last week and will probably do more at its next meeting in May.

This is good news for savers, because interest on savings accounts is already starting to rise again and the trend is generally upwards. I can’t benefit from American interest rates in Germany, but since the ECB will probably continue to raise interest rates longer than the Fed, we will slowly catch up on interest rates in Germany.

… the troubled banks?

The message from the US Federal Reserve is clear: Fighting inflation clearly comes before bailouts on ailing banks. Similar to the ECB a week ago, the Fed is trying to divide up its range of instruments: key interest rates are only there to combat inflation, while liquidity injections or emergency loans are the maximum response to the banking crisis. The rest must be regulated by the supervisory authority and politics.

The ailing banks and the financial markets in general cannot hope that the central banks will switch back to crisis mode as they did during the financial crisis. There was no inflation problem then, now there is.

… the economy?

All in all, higher interest rates are rather bad for the economy. The higher the interest rates, the more companies have to pay to get fresh capital – and that in one of the worst economic crises since the Second World War.

Sure: Despite all the warnings, the economy in the USA has not collapsed, and that despite the highest interest rate hikes of all time within just one year.

However, the following applies: Postponed is not cancelled. Real estate and tech have been struggling for a while and the economy is poised for a ‘soft landing’ with a mild recession in the summer. The banking crisis now made this landing more jerky. Above all, medium-sized companies in the already weakened sectors will have even more financing problems. The big companies can finance themselves on the financial markets, the smaller ones need the banks. With every rate hike by the Fed, the risk of the soft landing turning into a hard one also increases.

… my share portfolio?

By raising the key interest rates, the Fed and the ECB also wanted to send a signal that the new banking crisis can be mastered. Otherwise the rate hikes would not have been possible. Together with the rapid intervention of supervisory authorities and politicians, the situation seems to be calming down.

Unfortunately, that does not mean that price jumps are now to be expected. With the current turbulence and the consequences of interest rate increases, the economy will not be able to live up to the high expectations. Soft or hard landing in the US, anemic growth in Europe and high interest rates: The uncertainty on the markets will remain for the time being.

My tip: stay cautious and stick to investment strategies that are as long-term and broad as possible.

*Carsten Brzeski (51) is chief economist at ING Diba, Germany’s largest direct bank (9.1 million customers).

He looks at the big picture and its consequences for bank customers’ money. He also keeps an eye on economic developments, central banks and trends on the financial markets.

This article comes from BILD am SONNTAG. The ePaper of the entire issue is available here.