3.2 - Economic Factors Flashcards
When economic factors are referred to in the context of financial services, it is referring to changes in:
- Interest rates
- Economic activity
- Exchange rates
Interest rates definition
The amount that a financial services provider charges a borrower when it lends money or pays to a saver
What are interest rates described as?
The price of money
In what situation will prices rise?
If consumers are demanding more than businesses are able to supply
What is the result of a widespread increase in price?
Inflation
Inflation definition
A rise in prices, which means that the purchasing power of money falls
What did it mean the bank has to do when they were given responsibility for using Bank rate to deliver ‘price stability’?
To maintain the annual rate of inflation at around 2%
What happens if the bank’s MPC believes that inflation is likely to remain higher than the target rate?
It increases Bank rate
What happens to interest rates when Bank rate goes up?
Most lenders will automatically increase interest rates
What is the objective in increasing Bank rate?
To reduce consumer spending
What is the result of falling demand for property?
Prices will fall and builders may decide to build fewer new properties
Credit crunch definition
A reduction in the availability of loans or a tightening of conditions needed to obtain one
What did the credit crunch result in banks doing?
- Reducing their maximum loan-to-value ratios to 75% or less
- Dropping mortgage income multiples back down to three times gross salary or less
- Tightening credit scoring procedures
Which homeowners were worst affected by the financial crisis?
- Those who had used high loan-to-value mortgages to buy properties
- Those who had taken advantage of mortgage equity withdrawal
How did the Bank of England help mortgage holders to keep up to date with monthly payments?
By cutting Bank rate as far as possible
