Interest Rates

What we need to know… What are interest rates The current interest rate Impact on businesses of a change in interest rates Responses to change in interest rates

What are interest rates? The rate of interest is a cost. It is the cost that we have to pay for using other peoples money or if other people use our money. An interest rate is the overall amount that has to be paid back over and above the original amount borrowed.

Who sets the interest rate? The base rate for borrowing money is set by the Monetary Policy Committee at the Bank of England. Bank of England Website

Sources of finance where businesses and individuals incur interest charges…

Interest Rates of other lenders…. HSBC personal loan, HSBC Barclays personal loan Barclays Provident Cash Loans Store Cards Store cards interest rates Credit Cards Savings Ocean Finance News Article

What is a fixed rate loan? This is a loan with a set interest rate. During a certain period of time the interest a person pays will not rise or fall.

What is a variable rate loan? This is where the interest on a loan tracks the base rate set by the Bank of England…

How are the general public affected by Interest Rates? Increasing Interest Rates An increase in interest rates will mean payments on consumers borrowing will increase. As a result consumers will generally spend less and will be less willing to purchase on credit. It will be more benefit for consumers to save. Decreasing Interest Rates A decrease in interest rates will mean payment on consumers borrowing will decrease. In the long run this will encourage consumers to spend more and they will be more willing to purchase on credit

How do Interest Rates affect Businesses A rise in interest rates Businesses will be willing to borrow less money and they might also try to reduce any current borrowing that they have. (reducing their gearing ratio) They will be less willing to invest and expand the company. Consumer spending will decrease, this will lead to a fall in demand for businesses. With increased costs (loan repayments etc.) and a fall in demand, businesses my have to make staff redundant. In the worst case scenario the business can go bankrupt. It becomes more beneficial to save. A high interest rates will increase the value of the pound. This means that imports will become cheaper. But it will make exports less competitive. A decrease in interest rates Business will be more willing to borrow. They will be willing to expand the company as loans are cheaper. Consumer spending will be increasing and they are likely to see an increase in demand. Costs will reduce, therefore profit margins will rise. Less incentive to save. Low interest rates decrease the value of the pound. This will means that imports will be more expensive. This can increase businesses costs. But it will make exports more competitive.

How can interest rates help control the economy? Increased interest rates will stop people buying and businesses expanding. This will therefore stop prices rising and combat any inflationary pressure. If interest rates are lowered this will encourage spending and borrowing. When its cheaper to borrow, businesses are more likely to borrow money to expand; this can create further employment and help the economy grow and help lift an economy out of recession…

What is likely to happen to interest rates? BBC News Clip