Interest Rates (Edexcel IGCSE Business)

Revision Note

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

The Impact of Interest Rates on Business

  •  The interest rate is the cost of borrowing money and the reward for saving

    • Lenders charge interest on borrowing at a rate higher than that of the Central Banks base rate and award a lower rate on savings and investments

    • The Central Bank is the Governments bank and is responsible for managing the flow of money in an economy and also regulating the banking system
       

The Implications of Rising Interest Rates on a Business

Implication

Explanation

Higher loan repayments

  • Businesses will have to pay more on new loans. If their existing loan is a variable-rate loan, they will have to pay a higher amount back each month

Fall in exports

  • Exporting businesses may see demand for their products overseas fall as higher interest rates usually strengthen the value of the domestic currency, making their products more expensive abroad

Credit sales fall

  • Customers are less likely to purchase goods on credit when interest rates are high, leading to a fall in sales

Savings become more attractive than investment

  • Businesses may be less willing to make  capital investments when their retained profit may be more profitably invested into a savings scheme

The Impact of Interest Rates on Consumer Spending

  • Low interest rates can stimulate demand in an economy

    • Household repayments on mortgages and short-term credit borrowing is likely to reduced

    • Consumers have more disposable income to spend on goods and services

    • They may take advantage of cheap borrowing to fund large purchases such as consumer durables

  • Low interest rates are not always beneficial for consumers

    • Some households rely on the income they receive from savings to fund their day-to-day living expenses 

      • Pensioners and those using savings may struggle to afford necessities and are likely to reduce their non-essential outgoings, especially if inflation is high

Examiner Tips and Tricks

You may be asked to calculate the total cost of a loan at a given rate of interest. Make sure you show your working, give your answer in the given currency and write your final solution in the space at the bottom of the workings box.

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Lisa Eades

Author: Lisa Eades

Expertise: Business Content Creator

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.