Apart from savers, who benefits from high interest rates?
C.Rivet
To adequately answer this question, The Press called on Nathalie Elgrably, senior economist at the Montreal Economic Institute and university teacher.
“In order to identify who wins and who loses with high interest rates, we can first distinguish between two types of economic players: lenders and borrowers,” Ms.me Elgrably.
In general, lenders benefit from increased interest income on funds lent. However, their level of “profit” in a situation of rising interest rates depends on their cost of access to these funds and the capital available for these loans.
PHOTO PROVIDED BY THE MONTREAL ECONOMIC INSTITUTE
Nathalie Elgrably, senior economist at the Montreal Economic Institute and economics teacher at the university level
For example, explains Nathalie Elgrably, banks will not necessarily make more “profit” from interest income with their loans to individuals and businesses if their cost of access to interbank capital, in particular the established key interest rate by the Bank of Canada, is also higher.
Fewer loan applications
In addition, in a situation of rising interest rates, banks’ income and profits from their lending activities may stagnate or even decline if the rise in interest rates severely dampens the demand for loans among individuals and businesses.
Moreover, it is among the most indebted borrowers that the rise in interest rates can prove to be very costly in the short and medium term. A priori in the case of variable rate loans, and those whose renewal is imminent at much higher interest rates.
The most indebted individuals and businesses, whose net incomes are stagnant or declining, are particularly vulnerable to the budgetary impact of the sharp rise in interest rates.
This vulnerability is beginning to manifest itself in the growing number of insolvency cases that are being filed with financial and legal authorities these days.
Savers
As for savers who could “benefit” from higher interest rates, economist Nathalie Elgrably warns that it would be wrong to assume from the outset that they come out on top in terms of the net return on their savings.
Why ?
“To fully understand the rate of return on savings, and therefore the evolution of the purchasing power of savers, it is important to distinguish between the gross return according to the nominal interest rate and the net return according to the of real interest after the negative impact of inflation,” points out Mr.me Elgrably, in discussion with The Press.
The evolution of savers’ purchasing power is directly affected by the rate of inflation, especially among people with stagnant or fixed incomes. Therefore, even if the interest rate on savings increases, savers do not “win” in terms of protecting their purchasing power as long as the rate of inflation remains higher.
Nathalie Elgrably, senior economist at the Montreal Economic Institute and economics teacher at the university level
“The evolution of the purchasing power of savers is directly affected by the rate of inflation, in particular among people with stagnant or fixed incomes. Consequently, even if the interest rate on savings increases, savers do not “win” in terms of protecting their purchasing power as long as the inflation rate remains higher,” explains Nathalie Elgrably.
“These days, for example, with the inflation rate still around 6%, savers whose interest rate on their deposits would have increased to around 4% remain “losers” of around 2 % per year with the evolution of their purchasing power. »
“Savings tax”
In a way, underlines M.me Elgrably, inflation is the equivalent of a “savings tax” in the way it eats away at and impoverishes the purchasing power of savers.
And this, despite the increase in the return on interest income on these savings, which is in fact the result of a monetary policy decision by the Bank of Canada, which aims to reduce inflation by raising the cost of credit in order to curb the demand for goods and services in the economy.
“The most obvious current example of the impact of this restrictive monetary policy can be seen in the residential real estate market,” concludes Nathalie Elgrably.
“The sharp rise in mortgage interest rates since the start of the year has caused the number and average price of transactions to fall from their overheated levels of just a few months ago. »
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