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Central Banks Are Raising Interest Rates
Team Consultiq
Central Banks Are Raising Interest Rates, What Does That Mean for Your Business?
Last month, the Saudi Central Bank – previously known as Saudi Arabian Monetary Authority (SAMA) – announced that it was increasing key interest rates by 0.75%. The move was in response to growing inflationary pressures as a result of rising global oil prices. With this hike, Saudi Arabia effectively joined the ranks of most other industrialized nations in raising key interest rates from their historic lows from prior to the 2008 financial crisis.
Let’s have a look at how this decision might affect the businesses in Saudi Arabia.
Higher interest rates result in reduced discretionary spending.
“When you have higher interest rates, it’s going to impact people’s decision-making,” said Tara Sinclair, chief economist at George Washington University and an economist at Indeed Hiring Lab. “If they’re not sure if they’ll be able to pay off their debt, they may not buy as much.”
A higher interest rate can make borrowing more expensive for consumers, reducing their discretionary spending. That means people of Saudi Arabia will be paying more to borrow money for things like home equity lines of credit, auto loans and credit cards. That could be bad news for retailers who depend on customers having money to spend. This is especially true for luxury and avoidable items such as luxury cars, expensive mobile phones, high-end apparel etc.
Higher costs of borrowing push up production costs
It is likely that consumers will be paying more for the goods they buy over the coming months – such as food, clothing and energy bills – as firms pass on their increased borrowing costs in higher prices. Rising interest rates make it more expensive for companies to repay debts and increase their costs of production. It also makes borrowing more expensive, which can lead to job losses as firms struggle to stay afloat.
And while most manufacturers expect their costs to rise this year, many are also looking at ways to keep them in check. For example, some are trying to reduce their exposure to imported materials by sourcing locally where possible or investing in automation technologies that can help produce goods more cheaply through greater efficiencies and reduced labour costs.
Higher funding costs reduce the attractiveness of investing in start-ups
In the early stages of a start-up, funding needs are minimal, so founders are able to bootstrap their way to profitability. The problem is that as companies grow, they need more money to fund their growth. This puts them squarely in the sights of venture capitalists, who have become the primary source of new funding for start-ups over the past decade.
Venture capital firms are the most critical source of investment capital for start-ups. But there is a problem: Venture capital firms are increasingly reluctant to invest in early-stage companies because of the high costs they face in making those investments. The problem is worsened for the venture capital firms who rely on borrowings from financial institutions on higher interest rates.
How to survive and continue growth in times of increasing interest rates?
With interest rates at an all-time high, how can you combat this? A business consultation is an important part of your business plan and can help you avoid many pitfalls that could threaten your success. Below are a few points to understand why we recommend you to have a professional business consultancy partner by your side:
-You’ll have someone who knows what they’re doing.
-You’ll have access to more information than you would by yourself.
-You’ll be able to make better decisions based on what the consultant will recommend.
-You’ll be able to avoid making mistakes that can cost you money or hurt your business’s reputation.
-You’ll have access to more information than you would by yourself.
-You’ll be able to make better decisions based on what the consultant will recommend.
-You’ll be able to avoid making mistakes that can cost you money or hurt your business’s reputation.
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