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Personal Finance March 2011

5 Reasons Why an Interest Rate Rise in Spain can Make you Poorer

When living in Spain, any interest rate rise is going to impact on the behaviour of your investments your pension, and your cash in more ways that you might imagine. I set out five of them for you below.

It all started in early March when the European Central Bank indicated that they were going to increase interest rates in April. It is a bold move and here is why. Increasing interest rates shows a degree of optimism by the Central Bank in that they feel they can. This is because they know it will put an additional pressure on debt burdened countries - such as Spain.

Not everyone agrees with this rosy outlook though. Only days later, Moody's Investors Service downgraded Spain's rating whilst cautioning that Spain's banks need to raise much more money than has been suggested by the government here.

1. Well, increasing headline interest rates can mean a stronger Euro. This means your sterling or US Dollar pension will buy less.

2. Higher base rates lead to more expensive mortgages, more defaults, more supply, falling property valuations and longer selling phases.

3. More expensive borrowing makes it more difficult to get funding for growing your business - not that it isn't difficult enough already!

4. Increases in interest rates do little to stimulate economic growth locally besides.

5. Higher inflation means your investments have this hurdle to overcome in order to achieve any real growth.

After years of "never having it so good", inflation is going to become a feature of the years ahead. It is not a pebble you can easily remove from your shoe. Times of inflation signal a real need to re-think how you best manage your personal finances to "inflation proof" your assets.

Marius Hampden is the financial correspondent for Spainwide.

The information contained within the article is for information purposes only and does not constitute advice, if you don't understand any of it's contents we recommend that you seek independent financial advice.