Question

critical review of the impact of exchange rate and interest rate changes on the business/organisation.

Answer 1

Interest rates

An increase in interest rates can affect a business in two ways:

Customers with debts have less income to spend because they are paying more interest to lenders. Sales fall as a result.

Firms with overdrafts will have higher costs because they must now pay more interest.

The impact of a change in interest rates varies from business to business. Firms that make luxury goods are hit hardest when interest rates rise. This is because most customers cut back on non-essentials when their incomes fall as a result of interest rate rises.

Exchange rates

The exchange rate is the price of foreign currency one pound can buy. If the current exchange rate is two dollars to the pound, then one pound is worth two dollars.

The price of UK exports and imports is affected by changes in the exchange rate.

An increase in the value of sterling means one pound buys more dollars. The pound has appreciated (gone up) in value and become stronger.

A fall in the value of sterling means one pound buys fewer dollars. This means the pound has depreciated (fallen) in value and become weaker.

UK exporters benefit from a fall in the value of sterling. However British firms importing raw materials, components or foreign-made goods face higher costs and must either put up their prices or reduce their profit margin.