Inflation and Interest rates

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How will the rate hikes influence crypto?
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To control inflation, central banks increase the interest rates they charge on loans to commercial banks. Commercial banks then pass on these higher rates to their clients.

The Federal Reserve raises its key short-term rates (it does it in points - e.g. three-quarters of a point). The goal is to slow consumer spending, reducing demand for homes, cars and other goods and services, eventually cooling the economy and lowering prices. The goal is to make it increasingly costly for consumers and businesses to borrow — for homes, autos and other purchases. Reduce the amount of money in circulation - which will eventually lower prices - which will eventually lower inflation - because one definition of inflation is “too much money chasing too few goods”.

In affect, mortgage rates (for new loans) will jump, home sales will slump and (new) credit cards and (new) auto loans will get pricier. Savings rates will probably slightly juicier, though.

This means that inflation will affect the following things.

Our loans
1. Anyone borrowing money to make a large purchase, such as a home, car, or large appliance, will take a hit.
2. New loans will be more expensive and less accessible. The cost of the money we borrow is higher. We may pay higher interest rates on new loans and potentially be able to borrow less than before. High interest rates pretty dramatically increases the monthly payments and the costs.
3. The impact on existing loans may also vary depending on whether we have a fixed-rate or variable-rate loan.
4. If we have a variable-rate loan, they will get more expensive during inflation. Inflation will push up the interest payments we have to make.
5. Rates on (new) home loans can get about twice as expensive as they were.
Credit card borrowing rates
1. They will rise and will likely continue to rise.
2. Consumers increasingly rely on credit cards to help maintain their spending. Total credit card balances will hit all-time highs.
Our savings
1. If we save it in cash
  1. If we save money in the form of cash, it will neither grow now shrink. But it’s purchasing power will drop.
2. If we save it in high interest savings accounts
  1. Bear in mind that the compensation amount is often lower than the inflation rate. So the real interest rate may not always be positive.
  2. We may expect our savings to grow because of the interest payments paid by our banks on our savings accounts.
  3. However, with these savings, we will only be able to buy more than before if the real interest rate is positive.
Our financial investments
1. Inflation reduces returns on financital investments and erodes our purchasing power. In other words, our investments may be worth less when we need to use them. Inflation can affect different kinds of financial instruments differently.
2. Impact on Shares
  1. The impact of inflation and the rist of interest rates on the stock market is not straightforward.
  2. The general increase in the prices of goods and services may impact firms’ profits, thus affecting the price of their shares on the market positively or negatively.
  3. For retail investors, this is not easily predictable, as inflation will not impact the share prices of all firms in the same way.
3. Impact on Bonds
  1. Bonds may be more directly impacted by inflation and subsequent increases in interest rates, yet their price is less volatile than the price of shares.
4. Impact on investment funds
  1. These instruments not only eliminate the need to select individual shares or bonds, but also offer exposure to different major asset classes and economic sectors, depending upon the composition of their investment portfolio.
5. Impact on financial instruments with fixed Coupon rates
  1. Many governments or corporate bonds take this form. With this, we receive
    1. a periodic fixed payment until the date the instrument reaches its maturity (coupon); and
    2. the repayment of the initial investment (nominal value) at maturity
  2. At maturity, the amount received will be the same during inflationary cycles, but the purchasing power of this amount is reduced.
6. Impact on financial instruments with variable Coupon rates
  1. The value of the periodic coupon is variable
  2. There is no guarantee that the coupon rates will reflect the current level of interest rates, nor that they will compensate the rate of inflation.
  3. But the nominal value that will be paid at maturity is fixed. Its purchasing power is reduced.
7. Investment funds
  1. The impact of inflation depends upon the type of fund and the composition of the investment portfolio: types of asset classes, activity sector, etc.
  2. Balanced portfolios including investment funds, shares and bonds may help hedge against inflation risk.
Our pensions
1. Inflation risk will be present throughout retirement. No matter how long we contribute, the pension savings may not be adjusted to the rate of inflation.
Our insurance
1. Inflation may impact our insurance costs (premium), coverage and insurance pay-outs.
Any other financial products we have

How will the rate hikes influence crypto?

Higher rates mean that safe assets like Treasuries become more attractive to investors because their yields increase. That makes risky assets like technology stocks and cryptocurrencies less attractive, in turn.

Cryptocurrencies like bitcoin drop in value once the Fed begins raising rates. So will many previously high-valued technology stocks. In 2023, bitcoin has plunged from a peak of about $68,000 to under $20,000.

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Inflation