Interest Rates (AQA A Level Business) : Revision Note

Explaining interest rates

• The interest rate is a percentage reward offered for saving money and the percentage charged for borrowing money

  • Lenders commonly charge interest on borrowing at a rate higher than that of the Bank of England base rate  

    • They then offer a lower rate on savings and investments

• In recent years the interest rate has generally risen in the UK

  • In March 2020 the interest rate was reduced to a historic low of 0.1% to cushion the Covid shock

  • A series of rises throughout 2022-23, peaking at 5.25 %, were implemented to tackle inflation

  • In February 2025, the interest rate was cut, with more reductions expected in 2025 as GDP growth slows

• After a decade of ultra-cheap borrowing, interest rate rises since 2022 have hit both customer spending power and business costs

• If interest rates rise businesses will have to pay more on new or variable rate borrowing, which will increase their costs

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

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

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

  • This makes their products comparably more expensive abroad

How do interest rates affect costs and demand?

Interest rates and costs

• Business costs are affected in a range of ways when interest rates rise

The impact of rising interest rates on costs

Interest rates and demand

• Products customers demand and spending habits change when interest rates rise

The impact of rising interest rates on demand