interest-rates

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Explaining interest rates

The interest rate is a percentage reward offered for saving money and the percentage charged for borrowing money
- Lenders commonly charge interest on borrowing at a rate higher than that of the Bank of England base rate
  - They then offer a lower rate on savings and investments
In recent years, the interest rate has generally risen in the UK
- In March 2020, the interest rate was reduced to a historic low of 0.1% to cushion the COVID-19 shock
- A series of rises throughout 2022–23, peaking at 5.25%, were implemented to tackle inflation
- In February 2025, the interest rate was cut, with more reductions expected in 2025 as GDP growth slows
After a decade of ultra-cheap borrowing, interest rate rises since 2022 have hit both customer spending power and business costs
If interest rates rise, businesses will have to pay more on new or variable-rate borrowing, which will increase their costs
- Businesses may be less willing to make capital investments when their retained profit may be more profitably invested into savings schemes
Customers are less likely to purchase goods on credit when interest rates are high, leading to a fall in sales
Exporting businesses may see demand for their products overseas fall as higher interest rates usually strengthen the value of the domestic currency
- This makes their products comparably more expensive abroad

Impact	Explanation
More expensive borrowing	Overdrafts, new loans and variable-rate loans cost more, pushing up monthly repayments
Delayed investment decisions	Projects that looked profitable at a lower interest rate (e.g. buying new machinery, store refits) may no longer be viable
Suppliers pass on higher costs	When suppliers have to pay more to borrow at higher interest rates, they raise their own prices
Lower cost of imported goods	A higher rate of interest is likely to strengthen the pound against other currencies, lowering the price of supplies from abroad

The products that customers demand and spending habits change when interest rates rise

Impact	Explanation
Smaller shopping budgets	As interest rates climb, homeowners with mortgages see their monthly repayments increase With more cash going to the bank, less is left for clothes, meals out and other non-essentials
Big purchases delayed	Car finance and credit card interest rate increases make households delay buying more expensive items, such as new cars, sofas or TVs E.g. housebuilders such as Taylor Wimpey reported slower sales when interest rates were high
Saving looks more attractive	Higher interest rates tempt people to bank spare cash instead of spending it High-street spending on discretionary items is especially affected
Stronger pound makes exports less attractive	Higher UK interest rates attract foreign money, pushing up the value of the pound A stronger pound makes products such as Burberry coats or JCB diggers more expensive overseas, so demand abroad can fall