How do high interest rates affect deposits?

In an era where the global economy is becoming increasingly uncertain due to various factors such as inflation, fluctuating oil prices, and changes in central bank policies around the world, the policy interest rate has become one of the most important tools used to manage economic conditions.Especially interest rates that continue to rise in many countries, including Thailand.

What is Policy Interest Rate?

The policy interest rate is the interest rate that the central bank of a country uses as its main tool. Central banks adjust policy interest rates to guide monetary policy, particularly in an effort to control inflation and manage economic growth. The policy interest rate acts like a compass, guiding commercial banks in adjusting their deposit and lending interest rates to influence the behavior of the public and the business sector. For example, if the Bank of Thailand announces an increase in the policy interest rate from 2.25% to 2.50%, commercial banks are likely to adjust their deposit and lending rates accordingly.

Why is policy interest rate important for deposits?

1.Set the direction of deposit returns

When the policy interest rate increases, banks tend to raise deposit interest rates to encourage more savings, allowing depositors to earn higher returns.

2.Influencing saving and spending behavior

Higher interest rates encourage people to deposit more money because they will earn more interest.
Lower interest rates cause people to save less, but they in turn encourage them to invest or spend instead.

3.Linked to cost of living and inflation

The policy interest rate is an important tool for controlling inflation. When inflation rises, the Bank of Thailand tends to raise interest rates to slow down spending and reduce demand. During this time, depositors benefit from higher returns on their savings.

Beneficial effect

High interest rates positively impact depositors, particularly those with term deposit accounts or large savings, as they earn more from the interest. This helps promote savings in the system and reduces extravagant spending. In addition, high interest rates are important in controlling inflation, preventing prices from rising too quickly and maintaining economic stability in the long term.

Negative effect

1.Increased liabilities
Higher interest rates increase the cost of many types of loans, such as mortgages, auto loans, credit card debt, and business loans, which reduces a borrower’s net income.
2.Affect investment
High interest rates tend to make investors more cautious, as the cost of capital rises. Business operators are less willing to take on new loans due to higher borrowing costs, which slows down economic growth and can lead to higher unemployment.
3.Increasing cost of living
Raising the policy interest rate is intended to control inflation, but at times, higher rates can increase financing costs for businesses.

Deposit planning strategies during high interest rates

1.Compare interest rates
Different banks offer varying interest rates. By comparing options and selecting an account with the most competitive return, you can maximize your earnings while minimizing risk.
2.Choose a short-term fixed deposit
Since interest rates can fluctuate frequently, opting for a short-term fixed deposit allows you to stay flexible and adjust your plan quickly when interest rates rise again.

3.Put Some in a Fund
If you have a significant amount of idle money, consider putting some into a fixed-income fund or dividend stocks to boost long-term returns, while keeping the rest in a savings account or fixed deposits for short-term funds

High interest rates are not simply a matter of advantages or disadvantages. Their impact depends on each person’s perspective and financial situation. For depositors, high interest rates present an opportunity to increase returns on savings, but it’s important not to overlook the overall economic environment and the potential increase in interest-bearing debt that may follow.

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