The Impact of Raising Interest Rates on Marginalized Communities: Addressing the Cycle of Poverty and Inequality (2024)

There is an unfortunate reality that raising the interest rate on loans can lead to a chain reaction in the economy, increasing the cost of goods. This can be particularly problematic for individuals already living paycheck to paycheck, making it even more difficult to afford necessities such as food and housing. This can lead to a cycle of poverty, where individuals cannot break free from their financial constraints and improve their standard of living.

One of the significant ways that rising interest rates can lead to suppressed spending and increased economic inequalities is by increasing the cost of borrowing for households and businesses. This, in turn, can lead to lower levels of consumption and investment, which can further suppress economic growth (Kim & Tinsley, 2017). In particular, rising interest rates can impact low-income households, which may be more likely to rely on borrowing to finance basic needs, such as housing and healthcare (Baker et al., 2008).

Moreover, raising the cost of goods through raising the interest rate on loans can significantly impact marginalized communities. For example, individuals who are already living in poverty or who come from disadvantaged backgrounds may be more vulnerable to the effects of rising costs. This can perpetuate systemic inequalities as the economic system further marginalizes those already disadvantaged.

So, how can we address the problem of suppressing people by raising the cost of goods by raising the interest rate on loans? One approach is to advocate for policies that promote economic justice and affordability. This can include capping interest rates on loans or providing subsidies for necessities like housing and food. By doing so, we can help alleviate the financial burden on the most vulnerable and reduce the likelihood of a cycle of poverty.

Furthermore, rising interest rates can also impact small businesses, which may have fewer resources to absorb the costs of borrowing. This can lead to decreased investment in new equipment or facilities, reduced hiring, or even business closures (Fountas et al., 2018). This can further exacerbate economic inequalities, as small businesses often employ a disproportionate number of individuals from low-income or marginalized communities.

In addition to advocating for policies that promote economic justice and affordability, such as interest rate caps and subsidies, there is also a growing body of research on the role of financial literacy and education in mitigating the negative impacts of rising interest rates on marginalized communities. For example, studies have found that individuals with higher levels of financial literacy are more likely to engage in positive financial behaviors, such as saving and investing, and less likely to engage in risky borrowing (Lusardi, 2015). Financial literacy programs and interventions have been shown to be effective in improving financial outcomes for low-income individuals and communities (Hilgert et al., 2003).