How_Money_Works_-_The_Facts_Visually_Explained

Investment

decreases due to

costly loans and

low confidence

Export

prices rise

Exports

fall

Import

prices fall

Imports

increase

Household

consumption

decreases, with

less spending

and more saving

Economy

expected to grow

Commercial banks

raise interest rates;

loans become more

expensive, but savers

are rewarded

Demand falls

overall in the

economy

Inflation falls

Unemployment

rises

INTEREST RATES

The impact of changing interest rates

If interest rates fluctuated all the time, the economy

would become volatile. This is why the government

and central bank work together to keep inflation and

interest stable. Every time the interest rate is changed,

it sends a signal to consumers to either spend or save –

and may also increase or decrease confidence in the

state of the economy. An increase in interest rates

encourages saving, since higher interest will be paid

on money in savings accounts, and investments can

grow. Meanwhile, borrowing becomes less attractive

as interest repayments increase, and banks are more

selective about whom they lend to. This impacts on

the affordability of obtaining or repaying an existing

loan, such as a mortgage. By contrast, a drop in

interest rates is intended to stimulate spending, since

consumers can take out loans more cheaply, while

savers will tend to spend or invest deposits that are

attracting little interest. Interest repayments will also

drop for those with mortgages tracking the base rate,

leaving more cash for spending. While encouraging

spending through very low interest rates might boost

the economy, it can ultimately impact negatively on

long-term savings plans, such as pensions.

When interest rates

are raised

Higher interest rates make loans less

affordable, while high interest on

savings accounts encourages saving

rather than spending. As spending

slows, so does the economy, with

demand for goods and services

decreasing. This eventually affects

businesses and employment levels. Value^

of currency

increases

HOW THIS EFFECTS THE ECONOMY

Companies may

find they are less

profitable as it gets

harder to find loans

and investors

0 TIME (YEARS) 1 2

£

£££

The central bank

raises the base

interest rate

%

%

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