A paradigm monetary shift is underway—here’s what it means for your money

On March 19, the Bank of Japan (BoJ) closed the books on negative interest rates—a 12-year experiment meant to fight deflation by penalizing cash hoarding.

The BoJ raised rates from minus 0.1% to “around zero to 0.1%,” marking the first hike in 17 years. The change doesn’t seem like much at the surface, but it represents a broader monetary regime change that’s sweeping the globe.

In the case of Japan, policymakers had a unique problem: Decades of economic stagnation that began in the early 1990s after the bursting of the “everything bubble,” which saw stock and real estate prices plunge.

While most people are rightly concerned about inflation, Japan was battling deflation, or the sustained drop in prices caused by decreased demand, a fall in consumer and business spending, and reduced access to credit.

The BoJ wasn’t the only major central bank that resorted to negative rates.

The European Central Bank introduced a similar policy in 2014, with an emphasis on encouraging households and businesses to spend more money rather than save it.

Negative interest rates flip the rules of traditional finance upside down.

They penalize banks for holding cash instead of making loans and, in certain cases, charge customers for saving money instead of spending it.

Experts argue that negative interest rates didn’t work as planned at the end of the day.

As The Wall Street Journal noted, negative rates alone weren’t enough to encourage growth and stave off deflation. Ironically, what revived the economy was fiscal stimulus during Covid.

Japan may have been the most extreme case of central bank experimentation, but it’s not the only one. Central banks around the world are moving on from their so-called “unconventional policies.”

Their citizens are already feeling the effects.

Moving on from zero

Whereas the BoJ is just coming back to 0%, central banks in the U.S., U.K., Canada, and Europe have all hiked interest rates to multi-decade highs.

Although central banks can still cut rates (the Fed is expected to do so this year), the era of indefinite free money has likely come to an end.

“The days of ultra-low rates are over,” said Agustin Carstens, the general manager of the Bank for International Settlements (BIS), which is informally known as the bank of central banks.

Moving forward, “inflation will partly depend on factors that are not under central banks’ control,” Carstens said, citing global trade tensions, aging populations, and climate change as factors influencing inflation (and thus interest rates).

Regarding zero-bound interest rates, “It’s a bit like when you have a hammer, and everything looks like a nail,” explained Dirk Schumacher, head of European macro research at Natixis. “There’s only so much central banks in the end can do to spur growth, and they clearly ran into the limit here.”

According to Bank of America, investors are already “concerned about a prolonged period of tight monetary policy,” meaning higher for longer interest rates.

Expectations of “higher for longer” also mean that consumers will have to get used to the interest-rate sticker shock of the past two years.

What it means for your money

"Higher for longer" interest rates have many implications for peoples' personal finances, but the most obvious is borrowing costs.

People will have to think twice about getting a loan, carrying credit card debt, applying for a mortgage, or tapping into home equity.

These credit products may become less expensive over time, but they likely won’t be as affordable as they were after the financial crisis—or when Covid gripped the world economy in 2021 and 2022.

By many measures, Americans are already in over their heads in debt as they continue to binge on borrowing regardless of increasing interest rates.

Higher borrowing costs combined with inflation have many consumers “experiencing higher levels of economic stress compared to one year ago,” according to Silvio Tavares, CEO of credit scoring firm VantageScore.

According to Greg McBride, chief financial analyst at Bankrate, “Interest rates took the elevator going up; they are going to take the stairs coming down.”

Variable-rate products, like credit cards, are more directly influenced by changes in central bank policy. However, even with multiple rate cuts by the Fed, APRs will still be around 20% by the end of the year, McBride explained.

In the U.S., long-term mortgages are fixed and directly influenced by Treasury yields and the broader economy, so they’re not as sensitive to fluctuations in central bank policy.

Still, the Fed’s actions have a domino effect on mortgages and the housing market as banks pass on higher costs to their customers.

Mortgage rates have declined from their peak of around 8%, but remain stubbornly high for many homebuyers—a trend that has eroded affordability for millions of households.

Interest rates on auto loans and federal student loans have also gotten bigger, making it more expensive to purchase a new vehicle and attend college.

The double-whammy is that car prices have exploded since the pandemic, while college tuition costs continue to rise.

The one silver lining is that savings accounts tend to move hand in hand with interest rates and hover slightly above them.

That means savers who stow away their money in safe higher-yielding savings accounts can "outearn" inflation, even if central banks cut rates.