Whenever you apply for a loan of any kind, you will be subject to a service charge, which is a fee paid on the money that you borrow.
How Interest Rates Affect You
The reason why we have to pay these charges is because this is the lenders payment for providing you with a service, which is to loan you money over an agreed period of time.
Whatever the amount is you are going to borrow is named the principal amount borrowed, and the percentage that will be paid as the fee (interest) will be paid over a certain period of time and this is what we call the loan interest rate.
Interest rates influence day to day spending, savings in the economy and the prices we pay for goods and services. Low inflation helps maintain a stable economy and brings more value to the money we earn.
The Bank of England Interest Rates
The Bank of England is a vital influence on our economy and has two main purposes which are explored below.
Monetary Stability
Monetary stability means stable prices, low inflation and confidence in the currency. Stable prices are defined by the Government's inflation target, which the Bank seeks to meet through the decisions on interest rates taken by the Monetary Policy Committee.
How the Value of Currency is Effected by Interest
It is the essential duty for any central bank to maintain and safeguard the value of its currency in terms of what it will purchase. Things such as the rising of prices (Inflation) can reduce the value of money.
The Monetary policy is directed to achieving this objective and providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy operates in the UK mainly through influencing the price of money – the interest rate.
In May 1997 the Government gave the Bank independence to set monetary policy by deciding the level of interest rates to meet the Government's inflation target.
How Interest Rates can help in Improving the Economy
Low inflation is not an end in itself. It is however an important factor in helping to encourage long-term stability in the economy.
Price Stability is a precondition for achieving a wider economic goal of sustainable growth and employment.
High Inflation can be damaging to the functioning of the economy. Low inflation can help to foster sustainable long-term economic growth.