Changes in interest rates
The interest rate represents the cost of borrowing money or the amount a saver receives in interest.
Usually stated as a percentage, the rate reflects how much is earned or paid in interest. For example, an interest rate of 4% would require ÂŁ4 to be paid for every ÂŁ100 borrowed. Alternatively, a saver would receive ÂŁ4 for every ÂŁ100 they invested.
The impact of a change in interest rates
Changes in interest rates affect both savers and borrowers.
| Savers | Borrowers | |
| Increase in interest rates | Will receive more interest on their savings. This will encourage them to spend less so that they can save more. | Will have to pay more back for money that is borrowed. This will discourage them from borrowing. |
| Decrease in interest rates | Will receive less interest on their savings. This will discourage them from saving, so they may spend their money instead. | Will have to pay less back for money that is borrowed. This will encourage them to borrow more money to spend. |
| Increase in interest rates | |
| Savers | Will receive more interest on their savings. This will encourage them to spend less so that they can save more. |
| Borrowers | Will have to pay more back for money that is borrowed. This will discourage them from borrowing. |
| Decrease in interest rates | |
| Savers | Will receive less interest on their savings. This will discourage them from saving, so they may spend their money instead. |
| Borrowers | Will have to pay less back for money that is borrowed. This will encourage them to borrow more money to spend. |
How this affects businesses
Many businesses borrow money, so they are affected by any change in interest rates in the same way as individuals. They are also affected by changes in consumer spending that occur as a result of changes in interest rates.
Businesses that sell expensive luxury A product that can be touched., such as new cars, are the most likely to be affected by changes in interest rates. When consumers have less to spend, they are more likely to need to finance these types of goods through borrowing. As a result, they may sacrifice these purchases completely or replace them with cheaper alternatives, eg a second-hand car.