In the world of finance, we often get caught up in buzzwords and complicated theories. But at its core, the economy is straightforward: supply and demand determine prices, purchasing power drives demand, and technology shapes supply. When demand is higher than supply, inflation follows.
While the economy follows a cyclical pattern, the factors that drive these cycles usually differ. That’s why it’s crucial for credit unions to stay in tune with the ever-changing economic landscape. By understanding the present environment, credit unions can position themselves strategically to thrive in various economic scenarios.
Today we’ll take a closer look at our current business cycle and explore the factors that have the most significant impact on credit unions. By unraveling these influences, credit unions can strengthen their strategies and navigate the dynamic economic environment with confidence.
Pandemic-Era Supply/Demand Imbalance
The COVID-19 pandemic caused significant disruption to the global economy. Lockdowns and restrictions resulted in reduced demand for goods and services, so government stimulus packages helped to bolster incomes and increase purchasing power. However, the supply chains faced bottlenecks, leading to a shortage of certain products, especially in the manufacturing sectors. Industries such as motor vehicles, basic metals, and machinery and equipment were particularly hard-hit.
The supply/demand imbalance during the pandemic also had a profound impact on asset values and inflation. Auto values witnessed an unprecedented increase of 28.7% in 2021, contrary to the usual depreciation trend. Median home prices also skyrocketed 45% from December 2019 to June 2022. Inflation surpassed the Federal Reserve’s 2% target, peaking at 9.1% in Q2 2022.
Interest Rates and Their Impact
To curb inflation, the Federal Reserve began raising interest rates in Q2 2022. This increase in rates has ripple effects across the financial spectrum, affecting credit unions in various ways. One significant impact is the decrease in the value of fixed-rate assets and liabilities, commonly known as interest rate risk, which affects credit union balance sheets.
In a changing economic environment, credit unions also face challenges related to managing their loan portfolios. A robust asset/liability management process can help mitigate potential risks. In a rising-rate environment, it also becomes crucial to consider liquidity management and identify members in need of deposit accounts while offering competitive products.
How Rising Interest Rates Affects Credit Union Members
Rising interest rates also affect credit union members, especially those with lower credit quality, as rising interest rates and inflation can strain their financial situations. Businesses tend to reduce spending as the cost of funds increases, and members experience payment shock as variable-rate loans reprice, leading to increased default risk. Additionally, the decline in inflation-adjusted median household income since the pandemic has made it evident that members’ dollars don’t stretch as far as they used to. Home affordability is decreasing, with mortgage rates rising and limiting purchasing power.
It is imperative for credit unions to assess their loan portfolios, ensuring they have measures in place to handle potential defaults and credit quality issues. By staying proactive and responsive to these challenges, credit unions can protect their financial stability and continue providing valuable services to their members.
Positioning Credit Unions for Success
As interest rates continue to rise, it’s becoming more common for members to choose home additions or renovations instead of buying new homes and losing their valuable low interest rates. Credit unions can capitalize on this shifting demand by offering competitive home equity products.
While rising interest rates may temporarily decrease demand for refinancing, credit unions should be prepared to capture the renewed interest when rates inevitably fall again.
Members may be facing some challenges in the coming months, but credit unions have a long-standing history of empathy and support during times of need. By genuinely understanding and addressing members’ circumstances, credit unions can proactively find amicable solutions that cultivate loyalty and trust.
Navigating Rising Interest Rates With Agility And Foresight
The economic landscape is ever-changing, and credit unions must find ways to thrive and help their members achieve their financial goals. By staying informed, preparing for economic scenarios, and leveraging technology, credit unions can position themselves as trusted financial partners and continue serving their members’ needs seamlessly.
That’s why IMSI offers customized software and technology solutions designed to enhance member experiences and maximize the impact of your credit union’s offerings. With tools like web loan applications, online account opening, and Skip a Pay, we bring your credit union’s most powerful products directly to your members in a streamlined and efficient way.
Experience the future of banking with IMSI’s tailored software solutions and embrace the limitless possibilities that lie ahead for your credit union and its valued members.
