Interest rates “on hold”…until when?

The “will they”  “won’t they” about interest rates continues. On 16th September it was reported that the Bank of England would soon raise rates and then, just two days later, the Bank of England advised that they might CUT rates!

Meanwhile, despite the anticipated rise, the Federal Reserve decided, in the end, not to change rates this month. The fundamental improvements in the US economy imply that interest rates could be raised, which would benefit savers and pensioners and would help to choke off the possibilty of inflation as real GDP increases (remember your AD/AD diagram!) and unemployment falls (remember the Phillips curve!). However, it seems that recent global events and, in particular, the uncertainty in China have dented confidence. There is concern that a rise in rates could hold back investment and consumption so much that the main global economies would fall back into recession.

Notice that changes in interest rates also have an impact on exchange rates. Next month, the grade 12 students will start to learn about the connections.

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