01-08-2025
The impact of interest rate: Gainers and losers
Interest rate, arguably one of the most potent instruments in the toolkit of central banks, has always had a disproportionate impact on the economic lives of people. Underneath the technical language of monetary policy lies a deeper socio - economic divide, when interest rates move, someone gains and someone loses. But the pattern of winners and losers is rarely random. Often, it follows a familiar script written by the invisible hand of capitalism itself.
Let's begin with a simple question. What happens when a bank raises the interest rate on loans from 6 per cent to 8 per cent? For many middle-income and working-class individuals who rely on bank loans for essential needs like housing, education, or transportation, this increment can mean hundreds of extra rials every year, an amount they can ill afford.
Conversely, those with financial leverage corporations, investors, and individuals with capital parked in savings or fixed deposits stand to gain from higher returns. The system, by design, rewards the lender and penalises the borrower.
This phenomenon is not merely theoretical. It is visible in real-world case studies. Take the United States in the early 1980s under Federal Reserve Chairman Paul Volcker, when interest rates soared to nearly 20 per cent to combat inflation.
The move crushed inflation, yes but it also triggered a severe recession. Businesses collapsed under the weight of expensive credit, unemployment surged, and yet those with Treasury bonds and fixed - income assets enjoyed windfall profits. The capitalist class, with access to capital and credit, emerged largely unscathed, while millions of workers bore the brunt.
Economist Thomas Piketty, in his seminal work Capital in the Twenty-First Century, argued that when the rate of return on capital (r) consistently exceeds the rate of economic growth (g), wealth concentrates at the top.
Interest rates, especially when used to fight inflation, often accelerate this imbalance. When central banks raise rates to "cool down" the economy, what they often end up doing is cooling down job creation and wage growth areas that affect the lower and middle classes most, while asset holders continue to enjoy gains from safer, interest-bearing investments.
In Oman, the pattern is not very different. The average citizen relies heavily on personal loans to manage rising costs, education, healthcare, housing, while fixed deposits and treasury bonds remain the domain of the financially literate and wealthy. The difference between being a borrower and a depositor isn't just financial; it is deeply structural. It determines who thrives and who merely survives.
Interest rate theory itself has evolved over time. From the classical theories of interest proposed by Irving Fisher, where interest is seen as a reward for saving to Keynesian interpretations, where interest is more about liquidity preference and the demand for money, the debate has always orbited around who gets to control money, and at what price. Keynes, in The General Theory of Employment, Interest and Money, was especially critical of high interest rates during recessions, warning that they discourage investment and prolong economic stagnation. Yet, ironically, under modern capitalism, it is not uncommon for central banks to hike interest rates in the name of 'stability,' even at the cost of suppressing growth. In Islamic finance, which prohibits riba (usury or interest), the moral lens adds yet another perspective. The prohibition stems from a concern for fairness, mutual risk-sharing, and social justice. Here, profit should be the result of shared effort or trade, not from the exploitation of someone else's need. One might ask, in a society where borrowing money comes at a cost that outweighs its utility, can we claim that justice prevails?
Even more subtly, interest rates affect societal behavior. When savings become more profitable due to high interest, people tend to consume less. This hurts businesses that rely on consumer spending, leading to layoffs and economic slowdown. When borrowing becomes too costly, small entrepreneurs and startups retreat from investing in innovation. The ripple effect can suffocate long-term growth in favor of short-term monetary discipline. What remains unspoken in most public discussions about interest rates is that the financial system does not operate in a vacuum. It is embedded in a capitalist structure that rewards those who already have more to lend and penalizes those who must borrow to live. In essence, the interest rate is not just a number it is a reflection of power. So, when we ask who wins and who loses from a change in interest rates, we're really asking a deeper question: Who controls the flow of money, and for whose benefit? The answer, unfortunately, is becoming clearer with every monetary policy announcement. The capitalist system tilts the playing field, and unless consciously corrected through inclusive financial policies, it will always favor the gainer over the loser.
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