An interest rate is the cost of borrowing money or the return for investing money.
Interest payments and receipts
Interest Paid
- Paid to bank when overdrawn
- Paid to bank on a loan
- Paid to credit card or leasing companies
Interest Received
- Paid by bank on cash balances held
- Paid by customers if they are late settling invoices
Who sets the interest rates?
- The base rate is set by the Bank of England in the UK.
- Each month, the Monetary Policy Committee of the Bank of England meet to decide what the base rate should be
If an interest rate rise is a problem…
- Price discounts to stimulate demand
- Cost cutting to maintain margins and conserve cash
- Reduce capacity - eg, short time work, redundancies
- Improve management of working capital (eg, destocking)
- Reduce the debt burden
- Cut back on investment plans
Interest rates & exchange rates
- High interest rates in the UK (compared to other countries) will cause an inflow of capital into the UK
- This increases the demand for sterling and reduces the supply
- As a result the exchange rate goes up
- A stronger currency will make the exports more expensive and imports cheaper.