There is no way to fight it, but interest rates are rising quickly. It is a countermeasure against inflation, which is a larger, global issue. You can get a view of international rates, as of March 2022, at this link, where Canada was on par with the U.S., plenty of mixed messages in Europe, sky-high rates in Russia, pronounced market rates in Latin America, and 10X in Africa.
Since that global interest rate map was published, the European Central Bank announced “a plan to raise interest rates in July”, according to the NY Times, and a similar move in Canada was announced by the CBC.
Every banking authority has the same objective: control Inflation. To put the Canadian move in context, inflation clocked in at 6.8% in April 2022, versus a whopping U.S. rate of 8.3%.
Now, the WSJ says that the Federal Reserve will add 75 basis points (bp) to the benchmark rate, which will drive up the prime. This doubles down on the 25 bp increase added on March 17, and the 50 bp increase on May 5. The U.S. prime should land at 4.75%, on par with where it was in October 2019. For a historical recap, our go-to site is JPMC’s recap here.
Mercator’s projection: with virtually all credit card rates tied to the Prime plus a spread of 10.00% to 29.99% +/-, expect the average rate charged on credit cards assessed interest to quickly rise. The latest data shows to be 16.17% in March 2022. We expect the average will climb to 17.92% by the time June numbers flush out in September. That creates less available cash for every household.
So, what is a consumer to do?
To the extent that income growth does not align with expense growth, it is not rocket science to say that you should curtail spending. Remember dining out during the early days of COVID-19? Same plan. Reduce those events. With overall inflation at 8% and what amounts to a 30% increase in base interest rates, now is the time to exercise frugality.
And savings? Rates are low. If you do not have a rigid plan to save, you will find your budget in a mess, beginning now. Your parents may have banked 10% of their wages decades ago. Maybe that plan was not so square.
So, what is a banker to do?
Circle the wagons. This is not the first time we said that. Remember those impressive delinquency flow and charge-off rates that brought a nice bonus last year? Do not get too comfortable in 2023. We expect to see rapid portfolio deterioration in the 3rd and 4th quarters this year. Tighten credit lines. Forget about 0% balance transfer incentives. Do not be afraid to lock down high credit lines when you see FICO Scores deteriorate.
…this is a real-time issue, not a test.
And Central Bankers?
Rising interest rates are painful but necessary action. This is not Janet Yellen’s first rodeo, nor is it Jerry’s… but there is no surprise out there, and the action is global, as the NYT summarizes:
The higher cost of money reduces your purchasing power — what you can afford to buy — and the Fed is effectively making you buy less. And that should bring down inflation.”
But for now, brace for an sizzling summer or a very cold winter, depending on where you are, but with gasoline bumping up to $5.00 a gallon nationwide, it is time to pull in the reins.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
