We explain what makes interest rates go up or down and why they are important to you
29 April 2021
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Interest rates get mentioned a lot, but they aren’t always fully explained. Yet they’re relevant to anyone who is borrowing or saving money.
Simply put, interest is the percentage charged on the total amount you borrow, or earned on the total amount you save. Accounts that offer a service to save or borrow money usually have an interest rate, expressed as an annual percentage.
For example, putting £1,000 into a savings account with a 1% interest rate would earn you £10 over the course of a year.
High or low, interest rates are important because they influence the borrowing costs and spending decisions of consumers and businesses. While low interest rates can encourage people and businesses to borrow money for things like mortgages, big purchases, or investments, higher interest rates often do the opposite, and can restrain consumers and businesses from borrowing.
Here are the few ways interest rates can affect our finances:
In theory, if interest rates are low and people are paying less in interest, they have more money to spend, which can lead to a wave of increased spending throughout the economy.
And it’s the same for businesses. A lower cost of borrowing might encourage them to make bigger investments in equipment or services, which in turn boosts output and productivity and helps to lift the economy.
High interest rates mean that businesses and people in debt will be paying more interest to lenders. This can result in consumers having less disposable income and buying fewer things.
When interest rates on savings accounts are higher, people also tend to be more likely to save, due to the higher rewards they’ll receive for keeping money in the bank.
Changes to UK banks’ saving interest rates do happen fairly regularly. This is because interest rates can be variable, and so can fluctuate depending on what’s happening in the economy.
Some key factors include:
To find out more about inflation and interest rates, read our article here.
The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.
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