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Interest rate and inflation basics

Introduction

Inflation bites. General price levels affect our daily lives as much as our investments. As an important tool to stabilise inflation, interest rates have a profound impact on the financial market, determining the price movements of different assets. Learning the relationship between interest rates and inflation is therefore of utmost importance to investments.

Interest rates and inflation are intimately related

Inflation bites. To stabilise inflation, central banks tend to adjust interest rates from time to time.

Central banks adjust monetary policies to condition inflation levels

Have you thought about why a bowl of wonton noodles see such different prices between now and 40 years ago? That is the power of inflation. When the general price level rises persistently, the purchasing power of a currency falls. Mild inflation is conducive to economic development because consumers, expecting prices to continue to rise, prefer buying now than later to avoid the erosion of their purchasing power. Greater spending in turn encourages economic activities, creates employment and spurs investment. On the contrary, in times of deflation, consumers expect prices to fall and therefore defer spending.

Interest rate is the cost of borrowing. It is closely related to inflation. To stabilise inflation, central banks tend to adjust interest rates from time to time to ensure the economy will not get overheated or shrink. If interest rate rises, meaning the cost of borrowing goes up, consumers will be more inclined to save than spend. Companies will also slow their investments. The decrease in demand will end up holding back economic growth and slow down inflation.

More to read and more to watch

 

Getting started

Risk Warning

This page is prepared for general information purposes only and does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive it. This page does not constitute an offering document and should not be construed as a recommendation, an offer to sell or the solicitation of an offer to purchase or subscribe to any investment. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Asset Management (Malta) Limited accepts no liability for any failure to meet such forecast, projection or target. This page is based on information obtained from sources HSBC Asset Management reasonably believes to be reliable. However, neither HSBC Asset Management nor HSBC Asset Management (Malta) Limited do warrant, guarantee or represent, expressly or by implication, the accuracy, validity or completeness of such information.

Approved and issued by HSBC Asset Management (Malta) Ltd, Business Banking Centre, 80, Mill Street, Qormi QRM 3101, Company Reg No C20653 which is authorised to provide investment services by the Malta Financial Services Authority under the Investment Services Act.