Interest rates

The role of central banks in controlling interest rates and how they affect the economy VIDEOGRAPHIC

Transcript

00:00Interest is the cost of borrowing money, or the reward for saving.

00:10It is measured by a percentage, or rate.

00:12The most important interest rate, one that affects the whole economy, is set by a country's

00:17central bank.

00:18It is called the base rate.

00:23Central banks lend money to commercial banks, who in turn lend to businesses and individuals.

00:28Of course they charge interest on these loans.

00:32The theory, and the hope, is that these loans lead to more spending, and investment, and

00:37a healthy economy.

00:40When a central bank cuts its base rate, it becomes less attractive to save.

00:46On the other hand, businesses are more likely to borrow money to invest in new machinery,

00:51or take on more staff.

00:54People feel more confident about taking out a mortgage on a new home, or buying a new

00:58car.

00:59But let's not forget that the main task of any central bank is to provide a framework

01:06for the economy to grow sustainably, by targeting a steady currency and low inflation.

01:12So if, for example, prices are rising too fast, the central bank may want to intervene

01:17to cool the economy by pushing interest rates up.

01:21This would encourage people to save.

01:23They would tend to spend less on consumer goods.

01:26Companies may think twice about spending on new equipment, and retailers might cut prices

01:31to encourage trade.

01:33This in turn can calm inflation.

01:37But people who have a home loan with a variable interest rate would suffer.

01:41Their monthly repayments would increase.

01:44So high or low, interest rates have an impact on all of us.

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