It is important to understand how interest rates work and how they can affect businesses, as they can have a significant impact on their financing and their ability to make long-term investment decisions.
To begin with, it is important to understand what interest rates are: The interest rate is the rate charged for lending money to a person or company. For example, if a company borrows money from a bank, the bank will charge an interest rate for the money lent. Interest rates can be fixed or variable, depending on how the terms of the loan or financing are set.
When interest rates go up, it means that the cost of borrowing money goes up. This can be a problem for companies that rely on external financing to operate and grow, as they will have to pay more interest on their loans. In addition, rising interest rates can also deter companies from making long-term investment decisions, as they may become less profitable as financing costs rise.
In Latin America, interest rate hikes can have a particularly strong impact on business economics due to the economic and political uncertainty often faced by companies in this region. Companies may be more reluctant to take risks and invest in long-term projects when there is economic uncertainty, and interest rate hikes can exacerbate this situation.
A key factor to consider is that interest rate hikes can affect the labor market, increasing unemployment rates due to the high cost of raising financed capital for growth and even operations.
One of the most direct ways in which they can affect the unemployment rate is through their impact on economic growth. When interest rates rise, they can discourage companies from investing and expanding, which can lead to a reduction in employment.
Now, viewed from the perspective of inflation, when interest rates rise, inflation can increase, which can reduce the purchasing power of workers and thus reduce the demand for employment.
In summary, interest rate hikes can have a significant impact on the business economy in Latin America. They can increase financing costs and deter companies from making long-term investment decisions. It is important for companies to be aware of how interest rates work and how they can affect their financing and investment decisions.
Do you already monitor interest rates for business decision making?