Watch the following video http://www.bbc.co.uk/learningzone/cli ps/interest-rates/8495.html What are interest rates? How can they affect a business?

Interest rates Interest Rate Credit is about borrowing Owing money to others for a period of time Interest Rate Cost of borrowing money Calculated as a percentage Progress Arrow

Why do Businesses need credit? To finance purchase of assets (e.g. stocks, machinery, computers) To cover the period it takes customers to pay their invoices Enable the business to grow (larger offices, new staff members)

Monetary Policy Progress Arrow The deliberate use of interest rates to influence the level of economic activity is known as monetary policy The UK “base rate” is an interest rate set monthly by the Monetary Policy Committee MPC of the Bank of England. This rate acts as an indicator around which lending organisations base their rates of lending

Historic rates: www.bbc.co.uk/news/business-11013715

How can interest rates affect demand? What forms of loan exist? Mortgages Short term personal loans Credit cards Overdrafts These loans have “interest rates” where consumers will need to pay back a percentage on the amount borrowed

Task How can interest rates affect demand? Think pair share: How can interest rates affect demand? Discuss what will happen to a household’s disposable income if: Interest rates go up Interest rates go down

How can interest rates affect demand? Aggregate Demand represents the “total demand” for all goods and services in the UK – so interest changes tend to impact upon Aggregate Demand www.bbc.co.uk/news/business-14833152

Consumer demand Increase in interest rates: Demand for goods and services is likely to fall Consumers might chose to save rather than spend Less willing to make credit purchases Mortgage holders pay increased mortgage payments Progress Arrow

AD is not just made up of C As we know AD=C+I+G+X-M So how will an increase in interest rate affect the other elements of AD

Economic Growth – How? We discussed in the last topic the importance of economic growth – (revision ..what is GDP?) For businesses to expand and grow they often need loans to finance the growth So interest rates affect business growth And in turn economic growth So what will happen to economic growth if interest rates are high? Progress Arrow

Task Investigate the current interest rates being offered for personal/business loans and credit cards Why are there different rates available? How can lenders justify such differences in rates offered to customers What is the impact of interest rates on a business Progress Arrow

Exchange Rate Policy Exchange rates float and are set by market forces, demand and supply of the currency So strictly speaking the government does not have an exchange rate policy However the MPC will consider the impact of interest rate changes on the exchange rate of £ sterling Extension task – it wasn’t always the case, look at events of black Wednesday!

Black Wednesday In politics and economics, Black Wednesday is 16 September 1992, when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after it was unable to keep the pound above its agreed lower limit in the ERM. http://news.bbc.co.uk/onthisday/hi/dates/stories/s eptember/16/newsid_2519000/2519013.stm