Why Are Interest Rates Going Up, and Why Do We Always Feel It First?
Am I the only one who does not really understand how increasing interest rates is supposed to help inflation?
Because on the surface, it sounds backwards. Interest rates go up, mortgages get more expensive, rent often follows, and suddenly one of the biggest costs in life jumps again. How is that meant to make everyday living cheaper?
Especially when only about a third of people even have a mortgage. Why are we making life harder for that group in the name of lowering prices for everyone else?
Here is the simple version that actually makes it make sense.
The point of raising interest rates is not to fix prices directly. It is to slow spending.
When interest rates go up, borrowing money becomes more expensive. That applies to mortgages, personal loans, credit cards, and business loans. At the same time, saving money becomes more attractive because savings accounts pay more interest. So the system is trying to push people toward saving and away from spending.
If it costs more to borrow and you earn more by saving, you are more likely to pause before spending. You might delay upgrading your car, renovating your place, or putting things on a credit card. That means less money being spent across the economy at the same time.
For people with debt, higher interest rates usually mean higher repayments. That reduces how much spare cash they have each month. Less spare cash means fewer purchases, fewer upgrades, fewer impulse decisions. Again, spending slows.
Businesses feel this too. When interest rates rise, it becomes more expensive for businesses to take out loans or use credit. That can slow expansion, hiring, and big investments. When businesses spend less and consumers spend less, demand cools down.
And inflation, at its core, is about demand.
Prices rise when people are willing and able to pay more. Not because costs magically increase on their own, but because the market charges the maximum people can afford. When there is a lot of money flowing around, prices climb to meet it.
By making money harder to access and harder to borrow, higher interest rates are meant to reduce how much money is circulating. Fewer new loans also means fewer new dollars being created, because most money is created through debt. When less new debt exists, the total money supply grows more slowly, and existing dollars hold more value.
That is the theory.
Now here is the part that feels frustrating, and honestly valid.
This approach often hurts regular people first. Mortgage holders feel it immediately. Renters feel it soon after. Saving for a home becomes harder, not easier. Investing feels less appealing when everything feels uncertain. And when long term goals feel out of reach, people sometimes just spend anyway because it feels pointless to hold back.
That is where the theory starts to wobble.
If people believe home ownership is impossible and investing feels pointless, they may stop playing the long game. Both wealthy and struggling people can end up spending in ways that do not slow demand as much as expected. At the same time, essentials like food, energy, and housing do not become optional just because interest rates rise.
So while higher interest rates are designed to slow inflation by squeezing spending, they do not always land evenly or cleanly. They are a blunt tool trying to solve a complex problem.
If interest rates feel confusing or unfair, you are not missing something obvious. The logic makes sense on paper, but real life money behaviour is messier. And it is okay to understand how the system works while still feeling frustrated by how it plays out.
Both things can be true.
***Please remember our blogs aren’t intended as financial advice - they’re intended only as a starting point to give you a little extra info! For more in-depth advice catered to your personal financial position, please see a certified financial advisor.