interest rates

Effect of lower interest rates

Effect of lower interest rates

A look at the economic effects of a cut in the Central Bank base rate. Summary: Lower interest rates make it cheaper to borrow. This tends to encourage spending and investment. This leads to higher aggregate demand (AD) and economic growth. This increase in AD may also cause inflationary pressures. In theory, lower interest rates will: Reduce the incentive to save. Lower interest rates give a smaller return from saving. This lower incentive to save will encourage consumers to spend rather than hold onto money. Cheaper borrowing costs. Lower interest rates make…

Who benefits from low interest rates?

Who benefits from low interest rates?

When interest rates were cut to 0.5% in March 2009, few would have predicted that interest rates would have stayed low in UK, US and the Eurozone for so long. Interest rates have stayed at zero for several years – defying several predictions that they will rise soon. Who benefits from low interest rates and who loses out? Beneficiaries of low interest rates 1. Homeowners with variable mortgages The big winners from a period of low interest rates are homeowners who are paying a variable mortgage. Firstly, low interest rates will lead to lower…

What effect do interest rates have on wages

What effect do interest rates have on wages

Readers Question: What effect do interest rates (either a rise, fall or steadying) have on both monetary and real wages? I think I’ve got my head round it, but I’m looking for a nicely explain summary (understanding that there are probably a million of contributing factors that can lead to a million outcomes!) You are right, there is no direct link between interest rates and wages (either nominal or real), and there are thousands of possible combinations, which make it difficult to create simplistic answers. But, interest rates can have…

Base rates and bank interest rates

Base rates and bank interest rates

The Bank of England set the base rate. This is the rate at which they charge commercial banks to borrow from the Bank of England. In normal economic circumstances, this base rate will influence all the interest rates set by other banks and financial institutions. If the Bank of England cut the base rate, you would expect banks to also cut their mortgage and lending rates. If the Bank of England put up the base rate, you would expect banks to increase their mortgage rates.

Saving rates in the UK

Saving rates in the UK

It is not a good time to be a saver in the UK. Interest rates are 0.5% and inflation has been above 2% for a high proportion of the previous five years. Because inflation is higher than nominal interest rates, we are seeing negative real interest rates. This means many savers are seeing a decline in the real value of their savings. Pensioners who are relying on interest payments as income, are seeing a decline in their income. Inflation and interest rates

Tapering and the effect on interest rates

Tapering and the effect on interest rates

Readers Question: As the FED is talking about tapering and at the same time  keeping interest  rate low. How can they both go together? Tapering will raise yield as bond prices go down in  absence of any freak buying. And interest rate  will chase yield this causes interest rate to climb up. Fed Tapering means that the Federal Reserve will begin to stop buying bonds, and no longer continue to create money and buy bonds. This tapering could also be seen as a preliminary to reversing quantitative easing and selling…

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Negative Interest Rates

Readers Question: Is it possible to have negative interest rates? Negative interest rates occur when a bank charges you money for the privilege of looking after your savings. It is  possible to have a negative interest rate (e.g. -0.5%) Although it is quite rare. The Bank of England have recently talked about the possibility of a negative interest rate for commercial bank deposits at the Bank of England. Why is Bank of England Talking about a negative interest rate? The UK economy is still stagnant with little sign of economic growth. Usually,…