NCPA - National Center for Policy Analysis

Borrowing Rates Could Soon Be on the Rise

April 20, 2015

The moment U.S. Central Bank chief Janet Yellen makes the decision to increase borrowing rates will be a massive economic event. The prospect that higher interest rates in the world's largest economy could come this year has already sent the dollar surging against the pound and euro. It has also fuelled fears of a meltdown in countries that have borrowed heavily in the U.S. currency.

Borrowing is inherently risky, all the more so when the interest rate can change at short notice. Higher costs for those that have borrowed in dollars could cripple companies in Brazil and Turkey that were enticed by cheap credit to fund a new factory or office building, or just to pay the wages.

But while it is almost certain Turkey, Brazil, Russia and many others that have seen their businesses and governments borrow heavily in dollars to maintain their spending will suffer higher borrowing costs courtesy of Yellen, it seems unlikely funds in Europe now would opt to send billions of euros to banks in developing world economies such as Turkey, even when the returns are higher. That is because Turkey would be a risk too far when there are safe havens such as the United States starting to offer a return on totally safe investments like Treasury bonds.

Maybe Yellen will look at U.S. unemployment and consumer spending data at the Fed's meetings this month and in mid-June, and decide America remains too weak to withstand a rate rise. If she does, plenty of countries will cheer. Yet all the signals point towards a rise, with potential turmoil ahead.

Source: Phillip Inman, "Markets Face New Threat As US Federal Reserve Ponders Interest Rate Rise," The Guardian, April 18, 2015. 

 

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