Guide to Use of Interest Rates in UK Economy
April 21st, 2007 | by admin |Interest Rates
Rate of Interest determination
1. Loanable Funds Theory
2. Liquidity Preference Theory
Loanable Theory
Interest Rate Differentials
There are many different interest rates in the economy?
1. When a bank is lending there will be different levels of risk attached in lending therefore the riskier one will have a higher rate of interest.
Therefore interest rates have a risk premium
2. The longer the term of the loan , the greater the uncertainty associated with the loan and for this enhanced uncertainty the lender will expect a higher rate of interest. Interest rates then will incorporate what might be termed a time factor
3. With a higher rate of inflation in the economy , lenders will want to compensate themselves for the expected loss of real value. Therefore the real rate of interest is most important