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.