Inflation increases the cost of borrowing

When it comes to an individual’s financial experience, practically everyone could

have borrowed money from friends or parents when they were young to buy something they
wanted. As people grow older, they have particular responsibilities as adults in the
community, such as purchasing a home for living, a vehicle for transportation, and so on.
Because the cost of these necessities is so high that an adult who begins to acquire all of these
needs in his life cannot save up in a short period of time, they opt for some type of borrowing
such as hire purchase loan, personal loan, and many more so that they can own things they
want first and pay for it monthly rather than saving up the total money for it, which will take
years.

Although the idea of having what we want first and then paying for it appears
appealing, it is essentially how lenders make money from us. Every sort of borrowing from a
lender or commercial bank will incur interest charges based on the amount borrowed. For
example, Malaysia's well-known bank, Maybank, charges credit card interest rates ranging
from 15% to 18% per annum. This means that if we buy anything for RM 100 with a credit
card and pay it off beyond the specified period, we must pay an additional RM 15 due to the
interest rate. This is a simplified example of how a banking institution makes money by
lending money.

Following the pandemic, Malaysia's inflation rate has fallen as a result of the
lockdown, as demand for commodities dropped dramatically. Malaysia's interest rates
also have fallen in conjunction with the country's inflation rate. According to the (Bank
Negara, Interest Rate (Conventional) 2020), the interest in July 2020 was 1.75% witnessing
an all time lowest interest rate in our country. The benefit of a low interest rate is that
individuals do not have to pay more monthly or for a longer period of time. Following this
period of low interest, the Malaysian economy began to recover as investors and purchasers
were enticed by the amount of money they could save. People were eager to borrow from
banks to own what they desired until April 2022. This was one of the reasons Malaysian
banks generated high amount of profit last year. For example, according to (Ong, Hong
Leong Bank's 1q net profit jumps 17.7% to RM858M 2021), Hong Leong Bank in Malaysia
raised their revenue by 17.7 percent last year which clearly depicts the impacts of low interest
rate.
 As our economy in Malaysia was predicted to rise in 2022, global economic and
political conditions raised inflation even in developed nations such as the United States and
the majority of European Union countries, and Malaysia is one of the countries confronting
the same challenge. As the interest rate decreased when the inflation rate fell, the interest rate
has now risen as the inflation rate in our country has risen. According to the (Negara,
Malaysia interest Rate 2022), the interest rate in our country have increased 25 basis points
to 2.00% on May 11th. This indicates that rising inflation is gradually raising the cost of
borrowing. We have experienced the benefits of low borrowing costs for the previous two
years, and now that Bank Negara Malaysia (BNM) has regulated the interest rate to 2.00
percent, individuals will think twice to spend  money by borrowing from banks because of
the repayments that they must make.

Let's have a look at why interest rates rise as inflation rises, affecting the cost of
borrowing. As a country's inflation rate rises, the central bank will take steps to control
interest rate hikes. One approach to lower it is to raise the interest rate. As a result, Malaysia's
central bank, BNM, has raised interest rates. When interest rates rise, so does the cost of
borrowing. It raises the cost of borrowing. As a result, borrowing will decline and the money
supply will fall. A decline in the market's money supply will cause people to spend less
money on pricey goods and services. With the supply constant, the demand for products and
services falls, causing the price of goods and services to decline.