The Bright Side of Higher Interest Rates | Morgan Stanley (2024)

FAQs

Who benefits most from higher interest rates? ›

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

Key Takeaways. Morgan Stanley Economists see global economic growth of 3.1% in 2024 and 2025. Global growth remains steady and inflation is slowing, despite data volatility and shifting rate expectations in the first half.

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Rising rates usually benefit those who save and negatively impacts those who borrow. In short, a rise in interest rates means a higher cost of borrowing.

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Stocks in general tend to outpace inflation over time and are considered to be a good hedge. Many companies may be able to increase their prices for the goods or services they sell at a higher rate than any increases in their costs. This leads to higher profits.

The Pros of Rising Interest Rates

There are some upsides to rising rates: More interest for savers. Banks typically increase the amount of interest they pay on deposits over time when the Federal Reserve raises interest rates. Fixed income securities tend to offer higher rates of interest as well.

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Higher interest rates tend to negatively affect earnings and stock prices (often with the exception of the financial sector). Changes in the interest rate tend to impact the stock market quickly but often have a lagged effect on other key economic sectors such as mortgages and auto loans.

Who is most affected by rising interest rates? ›

“The RBA's decision to lift the cash rate to 4.35 per cent will hurt people with low incomes the most. The worthy goal of reducing inflation must not come at the expense of jobs and incomes, which have just taken another hit from the 13th interest rate rise since May 2022.

The winners. Unsurprisingly, bond buyers, lenders, and savers all benefit from higher rates in the early days.

The financial sector generally experiences increased profitability during periods of high-interest rates. This is primarily because banks and financial institutions earn more from the spread between the interest they pay on deposits and the interest they charge on loans.

Unsurprisingly, bond buyers, lenders, and savers all benefit from higher rates in the early days.

One sector that tends to benefit the most is the financial industry. Banks, brokerages, mortgage companies, and insurance companies' earnings often increase—as interest rates move higher—because they can charge more for lending.