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Fed Rate Hikes Expected to Hurt Car Sales in 2018

As automakers seal their first annual United States sales decline since 2009, expectations for more interest-rate hikes are contributing to the nearly unanimous view that car demand will drop again in 2018.

Few analysts anticipate sales this year will reach 17 million vehicles, which was just achieved for a third-straight year and only the fifth time in history. The Federal Reserve forecasts three rate hikes in 2018, crimping the free-flowing credit that helped fuel a record streak of demand growth now coming to an end.

“Consumers could face slightly higher costs for all their borrowing: credit-card balances, student loans, financing a house or a car,” said Charlie Chesbrough, senior economist at Cox Automotive, which owns websites including Kelley Blue Book and Autotrader.

Bloomberg quoted him to have added: “At the same time, higher rates drive up the cost to provide low-rate financing, which eats into profit margins and hurts the carmakers as well.”

The central bank, which hiked rates three times in 2017, raises interest rates to keep the economy from overheating and leading to high inflation. For consumers, those protective measures make it more expensive to take on new car loans or leases.

“The monthly payment matters,” said Jonathan Smoke, Cox’s chief economist. “When rates rise, many consumers do not have an option to pay more. We believe higher rates have already led the automotive market to see some shift” toward used-vehicle purchases instead of new ones.

The final tally for 2017 industry deliveries will be reported Wednesday when automakers announce December results. Analysts project that all major carmakers will report declines compared with the blowout final month of 2016, which benefited from an extra selling day.

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