122 123
Investment
increases due to
cheap loans and
high confidence
Export
prices fall
Exports
increase
Import
prices rise
Imports
decrease
Household
consumption
increases with
more spending
and less saving
EXCHANGE RATES
INTEREST RATES
CREDIT
Economy
expected to
contract
Unemployment
falls
Inflation
rises
Demand
rises overall
in the economy
GOVERNMENT FINANCE AND PUBLIC MONEY
Attempting control
40.5%
Argentina’s rate
of inflation in
April 2016, the
world’s highest
When interest rates
are lowered
Lower interest rates make it cheaper
to take out loans, and hence to spend
more money, while saving becomes
less attractive as interest rates are low.
With more money in circulation,
demand for products and services
rise, stimulating businesses and
increasing employment. Value^
of currency
decreases
HOW THIS EFFECTS THE ECONOMY
Companies may
become more
profitable as loans
and investors are
easier to secure
0 TIME (YEARS) 1 2
£££
£
The central bank
reduces the base
interest rate
NEGATIVE INTEREST RATE POLICY (NIRP)
In some countries, the central bank
has experimented with cutting base
interest rates to a negative figure, for
instance, − 0.01 per cent. If this rate
were passed on by commercial banks,
it would mean that depositors must
pay a percentage of their deposit to
the bank. But while a central bank
might impose a negative interest
rate to encourage spending and
investment, and discourage savers
from hoarding cash, commercial
banks usually tend to be reluctant
to pass negative interest charges
on to customers, and particularly
small businesses, as depositors may
be driven to withdraw their savings in
cash to avoid fees. Large depositors,
however, may pay negative rates for
security and a stable currency account.
Commercial banks
reduce interest rates;
loans are cheaper, but
saving becomes less
rewarding
%
%
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