Interest Rate Hikes May Drive You Crazy

New Study Shows the Effect of Interest Rates on Mental Health

Interest Rate Hikes May Drive You Crazy
September 28, 2018

By Erica Berardi

If the thought of higher federal fund rates sends your heart racing, you are not alone. A recent study found a direct link between government's influence on interest rates and the mental health of the general population.

The study, which appeared in the July 2018 issue of the Journal of Affective Disorders, is the first that links central banks' monetary policy decisions on interest rates with impacts on mental health.

"Governments, policymakers, and mental health practitioners need to be aware of the implications that monetary policy decisions may have on mental health," the study said. "Access to credit is an important aspect of modern society and may help individuals invest in their future, but debt, which is at present at historically high levels, may become unsustainable."

The study, conducted by researchers from the United Kingdom's University of Stirling and University of Nottingham and funded by the Economic and Social Research Council, only examined the effect of interest rates on non-mortgage, or unsecured, debt.

"Whilst it is important to avoid high unemployment and instability – which in themselves can be detrimental to mental health – central bankers need to understand that the tools they use to maintain economic stability can also have direct consequences to mental health," said Dr. Christopher J. Boyce, the study's lead researcher and behavioral scientist at Stirling Management School, in a press release.

The researchers found that for each percentage point increase in interest rates, the incidence of mental health issues by people heavily in debt rose 2.6 percent – resulting in an additional 20,000 cases of mental health difficulty at a cost of £156 million [$204 million] in the UK.

"Low interest rates encourage the uptake of debt, potentially creating unsustainable debt levels and putting many at risk when there are future interest rate rises," Dr. Boyce said. "When this happens, we need to ensure those in debt receive adequate support."

Though the study was conducted in the UK, the findings are also applicable in the United States, where residents have been watching the Federal Reserve's reaction to a continued strong economy. In August, the Fed's Federal Open Market Committee elected to hold the federal funds rate at the current rate of 2 percent, an indicator of the economy's health. However, the Fed signaled it is on track to raise rates in coming months. The Federal Open Market Committee next meets on September 25.

The study called for additional government resources for those in debt and for central banks to consider the impact of changing national interest rates.

If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.


Photo ©iStockphoto.com/EllenaZ

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