Business organisation and environment

Table of Contents

1. Topic pack - introduction
2. 1.1 Nature of business activity - notes
3. 1.1 Nature of business activity - questions
4. 1.2 Types of organisation - notes
5. 1.2 Types of organisation - questions
6. 1.3 Organisational objectives - notes
7. 1.3 Organisational objectives - questions
8. 1.4 Stakeholders - notes
9. 1.4 Stakeholders - questions
10. 1.5 External environment - notes
    1. External environment
    2. Introduction - PEST/STEP analysis
    3. The legal and political environment - introduction
    4. The legal environment
    5. Political stability and instability
    6. The social and cultural environment - introduction
    7. Social responsibility
    8. Demographic trends
    9. The technological environment - introduction
    10. The Internet and the World Wide Web (www).
    11. E-commerce
    12. Technological change
    13. The ecological environment
    14. The economic environment - introduction
    15. Economic growth
    16. The Business Cycle
    17. Inflation
    18. Exchange rates
    19. Unemployment
    20. Interest rates
    21. Government fiscal policy
11. 1.5 External environment - questions
12. 1.5 External environment - simulations and activities
13. 1.6 Organisational planning tools - notes
14. 1.6 Growth and evolution - notes
15. 1.7 Growth and evolution - questions
16. 1.7 Growth and evolution - simulations and activities
17. 1.6 Change (HL only) - notes
18. 1.9 Globalisation - notes
19. 1.9 Globalisation - questions
20. Print View

Interest rates

Interest rates can go up or down in response to economic conditions. These changes significantly impact on the operation of a business.

A fall in interest rates

A fall in interest rates has a range of effects. These include:

• Making saving less attractive - possibly increasing spending
• The cost of credit falling - making borrowing more attractive to consumers.
• Mortgages becoming cheaper - leaving more disposable income for spending.
• Business short-term debt charges falling - lower interest payments on existing borrowing. Will affect highly geared firms particularly.
• Investment becoming more attractive - projects that were not viable at higher interest rates may become viable now.
• The value of the national currency falling - cheaper exports, more expensive imports.

How might some of these affect a business?

As interest rates fall, so consumers have more money to spend and this causes a rise in sales, especially those made on credit. As business costs fall, so firms have more money to invest or pay in dividends. 'Highly-geared' companies (those with large external loans compared to shareholder equity) will gain as interest charges fall and they too may invest more. As a result, the demand for investment or capital goods will increase.

As interest rates fall, however, there is less incentive for overseas investors to deposit money and those with existing investments may transfer these to other countries with higher rates. The consequence of this is that the demand for a currency will fall and the supply of that currency will increase, leading to a fall in the value of that currency in relation to other currencies. As we discussed earlier the fall in the value of a currency will reduce the price of exports and increase the price of imports. As a consequence, the demand for domestically produced goods should rise abroad and at home, although the extent of this change will depend on how price elastic demand is.

If all, or many, of these changes happen then the economy should expand. As sales increase more people are needed to make the new goods and services and unemployment will fall. However, some skills might be in short supply and wage levels and inflation could increase as a result.