Interest Rates (Edexcel IGCSE Business)

The impact of interest rates on business

Spec point — 1.6.3 · The effect of interest rates on: • businesses • consumer spending.

The impact of interest rates on business

• The interest rate is the cost of borrowing money and the reward for saving

  • Lenders charge interest on borrowing at a rate higher than that of the Central Banks base rate and award a lower rate on savings and investments
  • The Central Bank is the Governments bank and is responsible for managing the flow of money in an economy and also regulating the banking system

Implications of rising interest rates for business

The impact of interest rates on consumer spending

Spec point — 1.6.3 · The effect of interest rates on: • businesses • consumer spending.

The impact of interest rates on consumer spending

• Low interest rates can stimulate demand in an economy

  • Household repayments on mortgages and short-term credit borrowing is likely to reduced
  • Consumers have more disposable income to spend on goods and services
  • They may take advantage of cheap borrowing to fund large purchases such as consumer durables

• Low interest rates are not always beneficial for consumers

  • Some households rely on the income they receive from savings to fund their day-to-day living expenses

    • Pensioners and those using savings may struggle to afford necessities and are likely to reduce their non-essential outgoings, especially if inflation is high

Exam Hint You may be asked to calculate the total cost of a loan at a given rate of interest. Make sure you show your working, give your answer in the given currency and write your final solution in the space at the bottom of the workings box.