Economic Influences - Interest rates 2.5.1

Interest Rates - is the price of borrowed money. Getting a loan will mean repaying with interest. If you borrow £10,000 at an interest rate if 5%, the repayment will, by the end of the year, be £10,000 + £500 (5%) i.e. £10,500. Interest rates vary depending on the level of risk involved in the loan.

At any one time there are a variety of different interest rates operating within the external environment; for example:

• Interest rates on savings in bank and other accounts
• Borrowing interest rates
• Mortgage interest rates (housing loans)
• Credit card interest rates and pay day loans
• Interest rates on government and corporate bonds  

Interest rates increase…	Interest rates decrease…
·       Businesses are less likely to borrow money expand	·         Investment may increase; existing businesses may expand
·         Investment may slow; there may be fewer new start-ups and slower growth in existing businesses	·         If the cost of borrowing is low, businesses start-ups may rise
·         Consumers are less likely to borrow money for larger items such as cars and holidays and credit card spending may fall	·         Consumer spending may increase: it is cheaper to borrow money with loans or credit cards
·         Mortgage repayments will increase leaving less disposable income for other spending	·         Mortgage payments may decrease leaving more disposable income for other spending
·         As a result of the impact on consumers, many businesses will face falling demand for their goods and services	·         As a result off the impact on consumers, many businesses will see rising demand for their goods and services and economic growth.