US Fed Keeps Rates Unchanged: Impact on Loan Borrowers

Last Updated: 14 Oct 2024

US Federal Reserve kept benchmark interest rate unchanged in its June monetary policy review meeting. This was the first time in 15 months that the US central bank did not increase its benchmark interest rate. Before this the Federal Reserve had increased benchmark interest rates 10 times consecutively. Benchmark federal funds rate currently stands in the range of 5% to 5.25% . This is the highest level of benchmark interest rate in US since 2007.

The interest rates that banks and Non-banking Financial Companies (NBFCs) charge on the loans that they give is tied to the benchmark interest rate. The higher the benchmark interest rate, the more will be the interest rate that you will have to pay on the loans that you take. So when benchmark interest rates are increased by central banks, the interest on loans that you take also tends to go up. 10 successive interest rate hikes by the US central bank has increased the interest rate on home loans in US, sharply.

US Federal Reserve and other central banks have raised interest rates in the past one and a half year in order to bring down inflation rate. When interest rate is increased by central banks, economic growth tends to come down. This happens because interest-sensitive consumption and investment slow down. This in turn results in lower demand for goods and services. Lower demand for goods and services results in decline in prices or inflation rate.

However, increase in interest rates is effective in bringing down inflation rate when inflation is caused by sudden increase in demand. The present scenario of high inflation has been mainly caused by thousands of supply chain and labor market disruptions caused by Covid lockdowns. Since it is a supply side caused inflation, central banks are finding it difficult to control inflation rate in spite of successive increases in interest rates.

The Federal Reserve also said that it may have to go for two more interest rate hikes this year, if inflation rate does not slow down. RBI too may have to match any increase in interest rate by US Federal Reserve by increasing interest rate in India. The Indian central bank may have to do this in order to prevent further depreciation in rupee against the dollar. When interest rate in a country, increases, its currency tends to appreciate against the currencies of other countries. So other countries too have to increase their interest rates if they do not want depreciation in their currency.

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So it is a good thing, from the perspective of loan borrowers in India that US Federal Reserve kept interest rates unchanged yesterday. RBI will not have to increase interest rates in India for the time being. Your loans, including gold loans, will not become more expensive, at least for the next few months.