Factors Which Effect Interest Rate Developments Within The United Kingdom

Authors Avatar

ECN2005: Financial Economics

Assignment 2 (replaces ECN2005PS)

Anthony Silk (20079491)

Factors Which Effect Interest Rates Developments Within The United Kingdom

In the UK, Interest Rates are now set by the Bank of England since it was granted operational independence in May 1997, and represent the rate of interest paid on borrowed money or alternatively measure the rate of return on savings.  In the following graph we can see how interest rates have fluctuated since 1997;



Such rates are determined by the MPC (Monetary Policy Committee), and have differed over the years due to many different factors, in particular the governments desire to maintain a stable economic system.  The following report aims to discuss in detail the various factors that affect such Interest Rate developments.

In a very simplistic sense, a key factor that affects changes in real interest rates can be viewed in the following diagram, showing the market for loanable funds.  Here, we can see that the total supply of savings is at it highest when interest rates and the quantity of loanable funds are at their highest, and alternatively the demand for credit and loanable funds are at their highest when interest rates are low.  By plotting these to curves, we can calculate the equilibrium rate of interest, and would be able to see it move in relation to changes in the economic environment, such as a rise in the demand for capital equipment due to an improvement in technology.  If this were the case then there would be an increase in the demand for loanable funds and the demand curve would shift to the right, increasing the interest rate and therefore encouraging a higher level of savings.

Join now!



In reality, the Bank of England's determination of the official interest rate is obviously a far more complex matter, taking into account many factors, such as house prices, consumer spending, exchange rates and most importantly inflation.

The Bank of England's ability to set interest rates is one of their most useful and effective tools in assisting them in maintaining economic stability.  As inflation rates have a knock on effect on unemployment levels and  general economic prosperity, the current economic situation of the UK is of key significance ...

This is a preview of the whole essay

Here's what a teacher thought of this essay


A very good attempt at explaining the factors that influence the base interest rate. However, diagrams and statistics would help give supporting evidence, with better layouts for quotes and graphs. Also, the difference between 'affect' and 'effect' should be learnt. Furthermore, the distinction between base rate and interest rate should be made clearer, in order to make the standard of essay even better.