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Impact of Interest Rates on UK Economy

The document discusses how interest rate changes by the Bank of England's Monetary Policy Committee impact inflation, borrowing costs, currency values, company profits and share prices, bond values, and exports. A rise in interest rates increases borrowing costs for companies, reducing profits and share prices. It also increases the value of the pound, making UK exports more expensive overseas and thus reducing them.

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Amir Hayat
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28 views1 page

Impact of Interest Rates on UK Economy

The document discusses how interest rate changes by the Bank of England's Monetary Policy Committee impact inflation, borrowing costs, currency values, company profits and share prices, bond values, and exports. A rise in interest rates increases borrowing costs for companies, reducing profits and share prices. It also increases the value of the pound, making UK exports more expensive overseas and thus reducing them.

Uploaded by

Amir Hayat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

The impact of

Interest Rates
Interest rates are set by the Monetary Policy
Committee (MPC) of the Bank of England. The MPC
is tasked with keeping inflation to the limits set by
the Chancellor.

High inflation erodes the value of If the interest rate goes up the cost of
money as you pay more but get less. borrowing to companies increases. This
This makes the electorate unhappy and reduces their profitability. This is one
consequently the Government are keen reason why their share price tends to
to keep inflation down. The role of the go down. An increase in interest rates
MPC is to maintain interest rates at a also reduces the value of corporate
level that keeps inflation under control. bonds. The rate of interest the bonds
pay is less attractive because interest
A little inflation is good as it gradually
rates have gone up.
increases asset values such as house
prices. The opposite of inflation is This also impacts on UK exports.
deflation. The price of goods and Foreign institutional investors bring
services constantly reduces which money into the UK to get the benefit of
means that consumers don’t buy the increased interest rate and convert
as they are waiting for goods to get their cash into sterling to deposit in
cheaper and cheaper. Ultimately banks. This drives up the price of
demand dries up, industry falters and the pound in the forex market. As a
the economy grinds to a halt. result UK exports to overseas markets
become more expensive to buy as the
local currency has devalued compared
the pound. So UK exports decline.
If the MPC reduces interest rates than
the opposite happens.

Interest Rates Interest Rates

Value of pound sterling

Impact on UK exports

Cost of corporate borrowing

Company profits

Company share prices

Value of corporate bonds

Source:
Stoakes, Christopher, 2007/8, All you need to know about commercial awareness,
Longtail.

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