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Study Notes

Interest Rates

AS, A-Level
AQA, Edexcel, OCR, Eduqas, WJEC

Last updated 15 Apr 2017

An interest rate is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed.

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

The Bank of England uses policy interest rates to help regulate the economy and meet economic policy objectives. 

The Bank of England Base Rate has been very low and stable for several years. 

What might happen if interest rates start to rise? Possible effects might be:

  • Cost of servicing loans / debt is reduced – boosting spending power
  • Consumer confidence should increase leading to more spending
  • Effective disposable income rises – lower mortgage costs
  • Business investment should be boosted e.g. prospect of rising demand
  • Housing market effects – more demand and higher property prices
  • Exchange rate and exports – cheaper currency will increase exports

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