How a high interest rate can help you fight inflation

How can a high interest rate help you fight inflation? Check out our guide as we look into how interest rates affect you.

December 19, 2022

Did you know that contributing just a handful of change each week will help you boost your savings account? The golden rule here is that consistency is vital. However, your savings don't just depend on you - they also rely on the interest rate.

Interest rates in Europe are at an all-time high. This is great for your bank account, but there's one thing even better.

A high interest rate helps fight inflation.

If you're wondering how that's possible, then read on. We'll explain everything you need to know so you can understand why high interest rates are so great.

How interest rates influence inflation

To understand how interest rates and inflation are linked, we must first explain what inflation is.

Inflation is when the cost of services or products is raised for some reason or another. Inflation is usually found in food, commodities, or energy costs.

While several things factor into inflation, it usually amounts to supply and demand. The demand outweighs the supply, driving the prices up. Currently, Europe is seeing an extreme rise in the rate of inflation.

Central banks decide to raise the current interest rates when inflation gets too high. Raising or lowering interest is the primary tool that central banks have to assist the economy. How high the interest is impacts supply and demand the same way inflation does, linking them together inextricably.

High interest works to lower the amount of demand the supply and demand chain is experiencing. In return, this reduces the inflation rates, meaning prices will drop down to a more manageable level.

At the same time, central banks must be careful not to cause deflation and plunge things too far. Then, they would have to lower interest. It's a careful balancing act that takes skill.

How a high interest rate helps you

If you're trying to save money, the hike in interest will only benefit you in the long run. You may not see results immediately, but it will eventually increase the amount of money in your savings account.

Savings accounts sometimes show a lag in reacting to the change in interest by weeks, sometimes months. This is especially true if your account is a high-yield savings account. Just because it's delayed doesn't mean the benefits aren't coming, so just be patient.

As helpful as these higher rates are for those who save, they aren't suitable for everyone. If you're looking to borrow money rather than save it, paying a loan back may hurt your wallet right now.

Rather than borrow money, try to store a little bit of it from time to time. After you have a certain amount in your savings account, you will start to experience the benefits of higher rates.

What to know regarding personal finance

When planning for your future, you don't need to worry too much about how the current interest will affect it. Just keep saving your money a little bit at a time. In fact, now is the perfect time to work on your budgeting skills.

If you've never heard of the 50/30/20 rule, it's an excellent structure for your budget. It's also easy to follow so you won't get confused.

Half of the money you make - so fifty percent - should go to essentials. These are things like bills, groceries, or gas for your car. It doesn't include things like your daily coffee, so keep that in mind.

Thirty percent of the money you make should go to your wants. This is essentially fun money. You can choose to spend it however you want.

The final twenty percent of your money should go into your savings account. Use it to fill your emergency fund. You should have three to six months' worth of money saved for expenses.

If your emergency fund is complete, then it can go to paying back any debts that you might have.

Banks and current interest rates

Current interest rates in Europe are at an all-time high, in an attempt to counter inflation and control it. Inflation is also at an all-time high, particularly concerning energy and food costs.

So banks have raised interest rates in an attempt to control this.

If the cost of things continues to rise, then interest rates will continue. Eventually, the amount of interest will control inflation and bring it back down to something reasonable.

Make your life easier

Now that you've heard about how high interest rates benefit you, you're probably looking for the perfect bank to register with now. Look no further - we're right here!

Traditional banks may have increased their interest rate, but bunq still offers the highest interest in the Netherlands!

It takes two minutes to sign up with us, and it has several plans to fit your needs, so make your life easier and sign up with bunq today!

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