Interest Rates

Bank of England is responsible for setting interest rates

Interest rates – price paid for borrowed money

Consumer spending depends of interest rates as:

• When interest rates are high consumers are more likely to save
• Increasing in interest rates make borrowing more expensive reducing consumers disposable income
• Increasing interest rates increase mortgage payments
• Pensions and investments are dependent on interest rates

Consequences of an increase in interest rates:

• Business overheads often increase
• Business may try to decrease borrowing
• Businesses try and save more
• Investment decisions are postponed
• Businesses try and reduce stock levels
• Some types of business are more effected e.g. those producing luxury items, those with high credit sales and those with high levels of overseas trade

Businesses have a tendency to have a long term view on interest rates