What happens to investment when interest rates rise? Why does this matter for economic growth?
Answer (2)
When interest rates rise, investment typically decreases. This is because higher interest rates make borrowing money more expensive for businesses and individuals. If a company wants to expand or buy new machines, they often take out loans. But with high interest, the total cost of borrowing becomes greater, making it riskier or less profitable to invest.Imagine a small manufacturing company in Laguna that wants to buy new equipment worth ₱1 million. If the interest rate is 5%, they might pay an additional ₱50,000 per year. But if the interest rate jumps to 12%, they would pay ₱120,000 yearly in interest alone. That extra cost might make them delay the purchase or cancel their plans. As a result, their productivity doesn’t improve, and they won’t need to hire more workers.In the Philippine economy, investment is essential for job creation, higher productivity, and economic development. Investment in factories, buildings, farms, and even education helps grow the country’s capacity to produce goods and services. If interest rates are too high, investments slow down, and that affects everyone—less output, fewer jobs, and slower growth.The Bangko Sentral ng Pilipinas (BSP) adjusts interest rates to fight inflation. However, it must balance this carefully. If rates are too high for too long, the private sector becomes hesitant to invest, and economic progress stalls.So, when interest rates rise, investment tends to drop, and this limits the country’s growth potential. That’s why government and economic leaders must monitor and manage interest rates carefully to support long-term development.
When interest rates rise, the cost of borrowing increases. This discourages businesses from taking loans to invest in new projects and reduces consumer spending on big-ticket items. As a result, overall investment in the economy declines.This matters for economic growth because investment is a key component of GDP and contributes to future productive capacity. Lower investment can slow down economic growth, reduce job creation, and limit innovation.
