How do changes in interest rates affect the economy?
The transmission mechanism of monetary policy means the ways in which changes in interest rates affect the spending and savings decisions of millions of households and thousands of businesses throughout the economy. The impact of rate changes can be quite complex and there are inevitable time lags between the Bank of England announcing a change in interest rates and it having an effect on demand, output and (finally) inflation. It is also important to distinguish between the effects of interest rate changes on the household sector (i.e. affecting consumption and savings decisions) and the corporate sector (i.e. affecting output and investment decisions) Interest rate changes work through the economy in various ways including the following: INTEREST RATES AND HOUSEHOLDS Housing market & house prices (wealth effects) High interest rates increase the cost of mortgages and reduce the demand for most types of housing. Conversely, a fall in interest rates should stimulate higher market deman
