The interest rate cycle is closely related to the economic or trade cycle. In theory, movements in interest rates should mirror the economic cycle. If the economy is growing strongly and inflationary pressures increasing – Central Banks will increase interest rates to slow down the economy and prevent inflation. If the economy enters into recession …
The Labour Party manifesto commitment has numerous spending commitments. These are financed by a mixture of government borrowing and tax increases. Would the increase in spending and borrowing lead to higher interest rates? In summary – the most likely effect would be a short-term fiscal expansion, which could lead to higher growth, a rise in …
An explanation of how the rate of interest influences the level of investment in the economy. Typically, higher interest rates reduce investment, because higher rates increase the cost of borrowing and require investment to have a higher rate of return to be profitable. Private investment is an increase in the capital stock such as buying …
A look at the economic effects of a cut in interest rates. Summary Lower interest rates make it cheaper to borrow. This tends to encourage spending and investment. This leads to higher aggregate demand (AD) and economic growth. This increase in AD may also cause inflationary pressures. In theory, lower interest rates will: Reduce the …
The savings ratio a big determinant of economic activity. Consumer spending accounts for 63% of GDP – dwarfing other areas, such as government spending, investment and exports. A rise in the savings ratio can have a very significant impact on economic activity. A blogger, mentioned a minister, Liam Fox calling for more savings. Former cabinet …
Interest rates determine the amount of interest payments that savers will receive on their deposits. An increase in interest rates will make saving more attractive and should encourage saving. A cut in interest rates will reduce the rewards of saving and will tend to discourage saving. However, in the real world, it is more complicated. …
I’ve been studying economics for 13 years and I can still get confused at the bewildering array of interest rates. Basically, interest rates can range from anywhere between 0% and 2,316% The most important rate is the base rate (sometimes referred to as the repo rate). This is the rate set by the Bank of …
UK interest rates were last raised over a decade ago – July 2007, but it is widely expected that this week the MPC will vote to raise base interest rates from their current low of 0.25%. The logic for an interest rate rise is that – inflation (3%) is above the 2% target, fall in …