Why High Interest Rates Are Hurting Families — What We Need to Do About It and Why We Should
In recent years, many of us have felt the sting of rising interest rates — from mortgage payments stretching household budgets for many of us, to the very real threat of losing one’s home if stricken with longer term illness that results your government paying 60% or so of the mortgage interest your lender is demanding. Yet, despite the widespread pain, governments and central banks continue to allow interest rates to climb, often defending their decisions as necessary to control inflation. But this raises a vital question: why do these policies tolerate such hardship, and who exactly benefits from them?
First, it’s important to understand how banks create money. Contrary to popular belief, banks don’t simply lend out deposits saved by other customers. Instead, when a bank approves a loan, it creates new money by crediting the borrower’s account. This “new” money increases the overall money supply and is only destroyed when the loan is repaid or the loan end of term is reached. The interest paid by borrowers remains as income for the banks — a system that essentially profits lenders while expanding the economy’s cash flow. Indeed it is reasonable to say that, when interest rates double, banks income doubles for the same effort. Wouldn’t we all like that.
So, if banks are creating money through loans, why do governments allow interest rates to rise to levels that cause hardship for so many?
The answer is complex but boils down to a mix of economic tools, political choices, and systemic priorities.
Central banks, tasked with controlling inflation, raise interest rates to slow borrowing and spending. This approach works in theory — it cools the economy and keeps prices in check. In practice however, it disproportionately impacts those with variable-rate mortgages or loans and lower incomes. These households bear the brunt of the squeeze, paying more for their loans or even facing eviction. At best, they their lifestyle takes a big hit and they have no chance of savings. while the better-off barely notice and carry on spending like before. Indeed, this spending by the better-off in society, simply prolongs the misery for the remainder. There are no built-in protections for vulnerable families. Meanwhile, governments often fail to complement monetary policy with adequate investments in affordable housing, rent controls, or wage support — leaving people exposed. Fact, nobody sets out to cause homeless as a tool of monetary policy.
Ideology also plays a role. Many governments operate within a neoliberal framework that emphasizes market forces and individual responsibility over state intervention. This mindset prioritizes financial “stability” and market discipline, sometimes at the expense of human welfare. Housing, in particular, is often treated as an asset for investment rather than a basic human right. Rising interest rates may lower property prices but simultaneously make homeownership unaffordable for many.
The principles that dictate control of inflation by manipulating interest rates were never especially effective, but the world of Bretton Woods, versus the world of Cryptocurrency and AI have so little in common that it is hardly a surprise to find that people buy what they need almost any way they can and pay the price later. Children must be fed and fees paid, food must be bought and cooked and homes heated or cooled. Transport is essential. None of these items will be curtailed because of interest rates, perhaps replacing the car might be done with more constraint or a new outfit might be down market a little. The truth is that interest rates are a terrible tool for controlling spending as a means of fighting inflation. Price controls upset industrialists, but on the other hand they can deal with it more effectively and will if they trust government. It has been done successfully in the past. There are undoubtedly more ways than one to deal with inflation and the time is here for change.
The banking sector, of course, has a vested interest in maintaining this status quo. Banks profit from the interest paid on loans, and attempts to reform the system — whether through public banking options, tighter regulation, or alternative monetary frameworks — face fierce opposition.
In short, the current system is structured in a way that sacrifices the wellbeing of many families to preserve financial market stability and bank profits. It’s time to rethink our economic priorities. The question isn’t just about controlling inflation or balancing budgets — it’s about who our economy serves. If it doesn’t work for people’s basic needs, then who does it work for?
We need policies that protect vulnerable households from harsh interest rate hikes, investments that make housing genuinely affordable, and a banking system that supports communities rather than just profits. Without these changes, the cycle of hardship will continue, and too many will pay the price, especially young people trying to strt off in life, already burdened with debt for their education and needing to build substantial deposits for a home from incomes that in many industries are stagnating and under further threat from AI tools.
I’ve just been reminded that I wrote about it before: https://medium.com/@4592d67c64b546b/interest-rate-hikes-whats-really-going-on-b9b4425abb48
