High interest rate, friend or foe? It depends on which side you’re on. If you are a lender, high interest is good and of course if you are the borrower, it is bad news indeed. Last year, Bank Negara Malaysia gradually raised the interest rate a few times from 2.00 percent in January up to 2.75 percent in August, in order to stabilize prices and maintain a good level of growth in the country. Any increase will profit financial institutions that will then increase their lending rates which is passed on to their customers.
Pay off debts
When interest rate is going up, the first thing that comes to mind is to get rid of debts as quickly as possible. It is time to be aggressive on your debt repayment schedule and reduce money going towards interest payment rather than the principal amount.
Get a fixed rate
If you anticipate or foresee a rising rate and you intend to apply for a bank loan, it is advisable to get a fixed rate. For example, if the fixed interest rate is 6 percent per annum, then it will remain so for the entire loan period. If your loan is the variable type, then expect to fork out more in tandem with the rising rates.
The stock market generally does not react well to a rising interest rate due to the lost of value. Investors may take advantage of this situation to go bargain hunting for discounted stocks. On the other hand, others may decide to reduce their investment or pull back their exposure to stocks. Of course, other factors like the current economic situation will determine the actual performance in the stock market.
If you have equities dumped into the utility and energy sectors, you may not be too worried compared to someone who has equities in the financial services which is sensitive to interest rates. Businesses that sell a product that requires their customers to take up financing, for example real estate developers and automakers are usually negatively affected when interest rate goes up.
The cost of borrowing becomes higher but it seems that the underlying interest rate is still perceived by Malaysians to be low compared to a few years back when it was 3.5% (2008). Hence, there seems to be very little effect on property prices as it remains high to date and it has not deterred people from acquiring more debts.
A study done by Standard & Poor in the US that analyzed data of Federal Reserve hikes between 1946 and 2009, combined with data from Standard & Poor’s 500, reported on sectors (in the US only) that perform well after interest rate hikes are “information technology, healthcare, telecommunication services, energy, consumer staples, industrials, consumer discretionary, utilities, financial and materials.”
For those who are not risk takers and prefer the comfort of consistent returns can place their money in fixed deposits or in fixed-income instruments. That way, they know the exact returns from their investments no matter what is happening to the interest rate. The good news is fixed deposit rates will also go up giving the investor higher returns. However, bondholders will be negatively affected but will benefit those who buy in after the rate hike. The general advice is to keep yourself updated on local and world economic situation and adjust your investment portfolio when necessary to protect your money.
Read other articles by Jacquelyn at WParent.com on parenting matters and Tips4Everyone.com on solving marriage problems.
3 replies to "What should you do when interest rates rise?"