Interest Rates
Interest rates are the price of borrowing. The central bank (Bank of England) sets the base rate, influencing all other rates. Higher rates reduce borrowing and spending; lower rates encourage it.
Real World
When the Bank of England cut rates to 0.1% in March 2020, the average two-year fixed mortgage rate fell to 1.2%, fuelling a house price boom of over 20% by mid-2022 as cheap borrowing boosted demand.
Exam Focus
Name specific transmission mechanism channels — mortgage, asset price, exchange rate — rather than just saying 'rates affect spending'.
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