Rising interest rates in the economy: What is the impact on the value of companies?

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Rising interest rates in the economy: What is the impact on the value of companies?

The rise in interest rates is a phenomenon that affects the economy in several ways, both positive and negative. In this article, we will analyze how interest rates influence economic activity, consumption, investment, inflation and the market value of companies.

Interest rates are the price of money. When interest rates rise, the cost of financing increases, which discourages debt and encourages savings. On the other hand, when interest rates fall, the cost of financing decreases, which encourages debt and discourages saving.

Rising interest rates have a contracting effect on the economy, as it reduces aggregate demand. Aggregate demand is the sum of demand for goods and services from consumers, companies, the government and abroad. When interest rates rise, consumers tend to spend less and save more, as the opportunity cost of consumption increases. Companies also tend to invest less and postpone projects as the cost of capital increases. The government may also have to reduce its spending or increase its taxes, as servicing the public debt becomes more expensive. Finally, exports may decrease and imports may increase, as the exchange rate tends to appreciate with rising interest rates.

Rising interest rates also have a stabilizing effect on the economy, as it reduces inflation. Inflation is the general increase in the prices of goods and services. When interest rates rise, aggregate demand decreases, which reduces pressure on prices. Furthermore, the appreciation of the exchange rate makes imported goods cheaper, which also contributes to lowering inflation.

Rising interest rates have a significant impact on the market value of companies. When interest rates rise, the present value of companies’ future cash flows decreases, which reduces their market value. Thus, in general, companies become less attractive to potential buyers, who demand a lower price to acquire them. On the other hand, sellers may not be willing to accept a lower price because they have higher expectations about the value of their companies. Therefore, rising interest rates can create an imbalance between supply and demand for companies in the market, making transactions more difficult.

In conclusion, rising interest rates have a complex impact on the economy and the sale of companies. On the one hand, it has a contractionary effect on economic activity and a stabilizing effect on inflation. On the other hand, it has a negative effect on the value of companies and their liquidity in the market.

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