Interest Rates and C/I

Discuss the extent to which the rate of interest can be effective in increasing consumer expenditure and investment
The reduction in the rate of interest can be effective on increasing consumer expenditure and investment, as it would provide consumers with more disposable income, to spend or invest.
The interest rate is decided by the Bank of England, at the start of every month and they decide to increase it, lower it or keep it the same, dependant on economic circumstances.
Usually with the reduction of interest rates, it would help to persuade consumers to send their extras disposable income on goods, which is thought to help the economy, pumping more money into businesses and back into the economy.
Most consumers would gain the ‘extra’ disposable income, as they may be on variable rate mortgages and so would be effected by lowering interest rates, as they would not have to pay as much each month, giving them more disposable income to spend, increasing consumer expenditure. Consumer expenditure should rise by low interest and also people having more disposable income, because saving the extra disposable income may be less visible to them due to the low interest rates; as they would only make a very small amount of money on their savings. Some consumers may not go with what the Bank of England is trying to persuade them to do, and that is spend their disposable income but instead save their disposable income, due to their lack of confidence in the economy, and so would think that saving would be a better idea; just in case they lose their jobs, they could still have some money to live their life at a near-enough normal standard.
As well as that other consumers would take advantage of low interest rates and take out loans and lend money to buy durables, which they may have not done with the higher interest rates because, they might have thought it was too much and not affordable, but the low interest rates seems to increase consumer spending, mainly on durables, as consumers would be more willingly to take out more loans.
Low interest rates do not only affect consumer expenditure, but also effect investment; which is money invested into companies to raise to capital, to increase production and meet demands. Businesses and companies would predict an increase in consumer expenditure, due to low interest rates, and so would invest more money into their companies to meet demands. This would probably be done by lending more money (through loans-due to low interest rates), and this would probably be considered because the business/company would have confidence that there would be high consumer expenditure also the company/business could get everything they wanted with a low opportunity cost as they could lend more money to pay for more capital goods. Also it may be done because they may anticipate that the rate of interest would probably increase, and so are stocking up with stock and upgrading capital goods with newer and more efficient ones. This also would be useful when there is high consumer expenditure, as they can meet the demand efficiently, and with low cost, initially increasing the company/businesses profits and value.