If interest rate goes up, it costs us more to borrow money for houses, cars, business and personal loans. If we are paying higher interest rates, we have less money to spend on other goods and services, which can result in the businesses that produce them earning less and the economy slowing down. But high interest rates are good for those people who have savings. On the other hand, if the economy slows down and inflation falls, the Bank of England may reduce interest rate to stimulate the economy, thereby increasing demands for goods and services.

Interest rate affects the exchange rate. For example, high interest rates may encourage overseas people to invest in the UK to get higher return on their money than is paid in their own country.

What this all means is that the pound we receive or spend can have an effect on everything from interest rate on businesses, personal loans and mortgages to how people living in other countries choose to invest their money.

To Summarise:

• The spending or saving decisions we make affect the economy
• The more we spend in the UK, the more our businesses earn thus allowing them to employ more staff or expand their business.
• The more we save, the more money is available for lending to other individuals and businesses that want to borrow.
• The Bank of England tries to control our spending by raising or lowering interest rate.
• High interest rate can be good for savers and bad for those who wish to borrow.