How interest rates affect market participants?

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Sultan Ali

UCL Graduate and Fully qualified accounting and economics teacher

Interest rates are very important in our economy, first thing first, interest rates refers to the cost of borrowing. Now in terms of consumers, if there’s an increase in interest rates those with mortgages will have higher monthly payments and less disposable income, they’ll make cutbacks to spending affecting businesses who in turn increase unemployment due to making lower profits given lower consumption. So you can see how an change in interest rates can have a multiplied effect on our economy. Generally business confidence is likely to be negatively impacted by an increase in interest rates as the higher borrowing costs mean profit predictions are lower deterring investment. sometimes Interest rates are needed to stop consumer spending due to inflation. However, our economy is Dynamic and there are other influences that will either cushion these effects or make them even more exaggerated. Hope this helps

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Usman Haroon

Medical Student at King's College London.

Hi Jackson, Interest rates are crucial in the modern market and have two key functions: 1) They affect people and businesses seeking loans. This is because banks provide loans but charge interest on repayments. So the higher the interest rate, the more banks charge to lend money, and the less likely people are to borrow money. Conversely, the lower the interest rate, the cheaper it is to take out a loan, and so people and businesses are more likely to borrow money to buy houses or invest in new projects. 2) They affect people and businesses looking to save money. This is because banks reward people and businesses with interest (ie free money) the more/longer money is stored in the bank. Hence, if interest rates are high, people will get more interest for saving, and are therefore more likely to save money in the bank and spend less on goods and services in the marketplace. This is good for consumers but bad for businesses! Hope that helps.