Interest Rates

Last updated Jun 28, 2023 Edit

• Buisness

An interest rate is the cost of borrowing money or the return for investing money.

• Paid to bank when overdrawn
• Paid to bank on a loan
• Paid to credit card or leasing companies

• Paid by bank on cash balances held
• Paid by customers if they are late settling invoices

• 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

• 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

• 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.

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