The central bank is deciding what to do with interest rates. Compare how each choice affects different households and firms.
Raise interest rates
- Savers: Earn more interest on their deposits.
- Home owners with loans: Monthly repayments rise, leaving less to spend.
- Shops: Customers cut back on big purchases, so sales may fall.
Higher rates reward saving and discourage borrowing, so household spending tends to fall.
Cut interest rates
- Borrowers: Loans become cheaper, so they can afford more.
- Savers, such as retirees: Earn less on their savings.
- Firms: Cheaper loans make investment more attractive.
Lower rates make borrowing cheaper and saving less rewarding, so spending tends to rise.
Keep interest rates the same
- Households: Can plan their budgets with more certainty.
- Central bank: Waits for clearer evidence before acting.
Holding rates avoids sudden changes, but the central bank may be too slow if the economy is changing fast.