Download Interest Rates - Beaconsfield High School Virtual Learning

Interest Rates
A2 Business Studies
Past exam questions
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•
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In 2012, many companies such as Thornton's, the chocolate retailer,
and Comet, the electronics retailer, announced poor financial results as
a result of difficult trading conditions. Several commentators claimed
that such businesses had been unprepared for changes in their
external environment.
To what extent do you think that it is possible for businesses to prepare
effectively for changes in their external environment? Justify your
answer with reference to Thornton's, Comet and/or any other
organisations that you know. (40 marks)
The external environment in which businesses operate can have a
significant effect on their success. To what extent do you think that the
external environment in the UK is favourable for businesses at the
moment? Justify your answer with reference to external factors and/or
businesses that you know. (40 marks)
Starter
1.
What is an interest rate?
2.
What have UK interest rates been like in the past?
3.
Why do some businesses and customers favour
low interest rates?
Watching the first two minutes of the following video
might help.
http://www.youtube.com/watch?v=e0PMduYaYPI
Learning Objectives
• Explain what an interest rate is.
• Analyse the consequences of a high or
low interest rate on different
businesses.
• Identify strategies appropriate for
business at different levels of interest
rates.
Interest Rate
• The reward for saving or cost of
borrowing
• Example: If a business borrows
£10,000 from a bank for a year and the
interest rate is 7% - it has to pay
_______ of interest. The same principle
applied if the business is saving money.
Bank of England Base Rates in
%
Interest rates
have been at a
record low rate
of 0.5% since
March 2009.
However back in
the early 90s
interest rates
peaked at 18%!!!
Imagine the
impact on
businesses back
then.
Who sets the interest rates?
• The Monetary Policy Committee of the
Bank of England set the base rate.
• Current base rate = ?
• All interest rates set by banks relate to the
base rate.
• Businesses are affected by the rate of
interest.
Activity: What do you think happens to
businesses when the interest rates are high?
The effect of high interest rates
• Businesses will have to pay back in interest on loans.
Firms may borrow less money resulting in investment
decisions being postponed or cancelled.
• Consumers may stop borrowing from banks and credit
cards and prefer to save it, they will spend less in shops –
this will have a negative effect on businesses.
• Foreign investors may seek high returns in the UK banks,
demand for £ increase and this raises the price of our £
(leading to a higher exchange rate), this could mean that
foreigners are also spending less on our goods, having
another negative affect on business.
What impact would high interest rates have
on the following businesses and how might
these businesses respond?
1.
Businesses which sell luxury products e.g.
Tiffany’s and Land rover Jaguar.
2.
Businesses whose products are bought on
credit such as new kitchens and
bathrooms e.g. Moben
3.
Businesses involved in overseas trade
such as companies who export their
products from the UK e.g Morgan Cars or
Mini’s
4.
Businesses involved in the housing market
e.g. Foxtons the Estate Agent.
Business Responses:
• Less borrowing from the banks.
• Less expansion of the business.
• Reduce costs, make workers redundant,
switch to a cheaper supplier, reduce
production.
• Introduce favourable credit terms to
customers or have interest free periods.
• Accept lower prices and profits.
• No response as their product is demanded as
it is a necessity good e.g. milk and bread.
The Bank of England has proposed a cut
in interest rates by 0.5 to 0%
•
Mr Sheridan, MD of a house building company says he fears the cut
might be "too little, too late". He says it may help if the banks use the
rate cuts to cut the amount his company pays to borrow money for
developments. They often borrow at a rate a few points above the Bank
of England base rate so local banks would still be charging interest on
loans although it should be lower than at present.
•
“Banks are not lending as much as they used to. The cost of borrowing
is not as much of a problem as how much you can get from them. If
they will lend us 10% less on a £1m project, that's £100,000 we have to
find somewhere else," he says.
•
He hopes it may encourage first-time buyers to get mortgages, if they
think they might get a better deal. "But it's too early to see what impact
the interest rate cut will have over the coming months. "The housing
market has slowed down but hopefully this is the bottom of the drop. If
the banks can get confidence back up it will help.”
Question
• Evaluate the impact of the interest rate cut on the house building
industry. (Hint: It depends on where we are in the business cycle)
Groups
Inflation
Growth
Ellie
Unemploy- Exchange
ment
Rates
Carly
Chloe
Fran
Danielle
Nicole
Laura
Sophia
Hanne
Aimee
Annabel
Katie
Clemmie