What links interest changes and consumer/business behaviour?
Base rate changes can affect consumer and business behaviour through changes in borrowing costs. A rise in base rates from the Bank usually leads to a rise in the interest rates that commercial banks charge. A fall in base rates tends to lead to a fall in the rates that they charge. When commercial banks’ rates rise, it becomes costlier for households and businesses to service existing loans or to take on new debt. This cuts the money they have to spend on other things, reducing demand. What about confidence? Changes in interest rates can have an important effect on business and consumer confidence. Usually, a rise in rates will reduce confidence, and a cut will lift it. The lower confidence is, the less likely that businesses and consumers will spend. This tends to limit overall demand.
