The effect of rising interest rates on the accounting and finance world

An increase in interest rates will negatively affect mortgages and loans, the cost of services, goods and materials, the bandwidth of wages nationally, profit margins in businesses, and the overall living standard for every household. It will also affect the profitability of banks and how they offer and regulate their loans to individuals and businesses.

In short, with interest rates, everything is going up, and, with costs being passed onto customers and borrowing costs also hitting them hard, businesses will suffer cashflow problems. Furthermore, those that depend on short-term financing, such as overdrafts, will undoubtedly feel the pinch. A further squeeze will be felt from a drop in consumer spending as the average wage earner and householder begin to tighten their belts.

The inevitable result is less spending and less borrowing overall in the financial sector as interest rates are hiked in order to offset inflation. A slow in consumer spending, especially at the luxury point of the consumer spectrum, will affect not only businesses’ bottom lines, but also their credit lines when it come to loans and overdrafts. Borrowing will become more expensive with repayments increased.

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There may also be those companies who have taken out non-fixed rate loans or credits, especially during the COVID-19 pandemic and are now struggling to keep their heads above water. Add to this the issue of raw materials becoming more and more expensive, supply chains struggling, and continuing concerns over energy and fuel costs and we have an extremely volatile and complicated financial climate. Times are hard, and the entire finance sector needs to adapt and implement meticulous cashflow management and financial reporting.

Mortgages are also seeing changes as interest rates are hiked, meaning many would-be first-time buyers will find it impossible to gain a step onto the property ladder, and those already making monthly payments seeing an alarming rise in payments.

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Conversely, a rise in interest rates means a rise in profitability for banks – retail banks, investment banks, and commercial banks – as demand for loans from individuals and other banks is increased. Insurance companies and brokers also hold massive cash sums because of customer’s balances and will undoubtedly see profits increase. There is also an expansion in the spread between long and short-term rates. This aids banks as they operate on borrowing on a short-term basis and lending on a long-term basis. “However, if interest rates become too severe,” notes Janet Dole-French, a journalist at Brit Student, “then this could start to hurt the banks, as demand for loans will drop and refinancing will also suffer a fall.”

Spiking interest rates have a great knock-on effect on the whole financing and accounting world, when it comes to businesses, mortgages, and financial institutions such as banks and insurance companies. Not all effects are negative, but it means a close eye should be kept on all financial forecasts so that risk and future-proofing can be managed effectively.

George J. Newton is a development manager in business at Write my research proposal and PhD Kingdom and always knows exactly what’s in his wallet. He also writes articles at Next Coursework.