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TSR Wiki > Study Help > Subjects and Revision > Revision Notes > Economics > Interest Rates and Monetary Policy

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Effects of an interest rates rise

• Increased cost of borrowing. This reduces demand for consumer durables purchased on credit.
• Higher opportunity cost of spending. This leads to an increase in saving as indivs postpone current consumption in favour of spending in future time periods.
• Increased mortgage repayments – reducing effective disposable income. (But increase unearned income from bank accounts)
• Higher interest rates have negative impact on share prices, and real and nominal house prices: negative wealth effect.
• So negative wealth effect and reduces current effective disposable income – spend less.

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