Effects of increasing interest rates on Banks
The profitability of the bank will increase with the increase in interest rate because it will directly yield cash, and the profits will be directed to the earnings (Mueller). Since the hike in interest rates occur in environments with strong economic growth and the bond yields are rising, the banking sector will experience a profit increase. Therefore, most consumers will demand loan spikes; hence, increasing the earnings for the banks. For instance, if a client has $ 2 million in his account, he will earn 1% interest, and the bank makes 2% on this money in the short run. Consequently, the bank will yield $ 40 million on the customer's account but pay back $20 million to customers (Mueller). That is when the rate of interest rises, profit on loans also increases because there is a high spread between the rate of the funds and the rate at which the bank is charging its clients.
Additionally, both long term and short term rates expand as the interest rates increase since the long-term rates rise faster than the short term rates. However, other rates such as car loan, prime, credit card, and money market will be affected by the increase in interest rates where all of them will rise.
Borrowings and increasing interest rates
When the interest rate that banks usually charge on their customers increases, it will indirectly influence the rates at which the bank charge the clients to borrow cash. Several individuals will be affected by the rise in the interest rates particularly if they have a variable rate of interest. Consequently, this will influence the value that consumers are willing to spend. Therefore, borrowings will decrease with the increasing rate of interest rate.
Lending and the increasing interest rates
High interest rate implies that consumers are lacking additional disposable income and have to cut back their spending. That is as the interest rate increases; banks will make fewer loans as compared to when the rate is low. Therefore, both consumers and businesses will cut back their spending for new equipment, thereby slowing the production rate. That is most firms will lower the number of workers in the company in an effort of holding any purchase of major equipment.
Bibliography
Mueller, Jim. "How Interest Rates Affect The Bank | Investopedia". Investopedia. N.p., 2006. Web. 24 May 2016.
