What Happens to Markets and the Economy When Interest Rates Rise or Fall?
Published / Last Updated on 12/02/2026
Over recent years we have seen interest rates rise to combat inflation and more recently, interest rates fall as inflation comes down and the need to stimulate the economy. We assume we all know the basics that when rates rise, mortgage payments increase (unless fixed) and savings income interest rises too and vice versa but what about other impacts of interest rate changes:
When Interest Rates are Lowered/Reduced
- Interest Received on Savings Deposits Will Fall.
- Bank profits will fall meaning overdraft, loans and other arrangement fees rise.
- Income taxes on this savings income interest will fall meaning lower tax revenue for government. Taxes will rise elsewhere.
- Mortgage Repayment Costs Fall.
- Lenders may cut mortgage rates (unless fixed).
- Lenders may offer more flexible mortgages.
- Lenders may offer higher income multiple (Loan to Income LTI) mortgages.
- People have more spare/disposable income which may push daily livings costs up (inflation).
- Property Prices Increase
- People can afford to borrow more.
- Gilt Yields/Bond Yields (Government Borrowing Interest Rates) Fall
- Governments can borrow more money are lower costs (gilt/bond yield).
- Capital values of gilts/bonds and fixed interest funds rise.
- Business Borrowing Costs Fall
- More investment in business.
- Business and economic growth.
- More business tax revenue for government.
- The Pound £ Weakens
- UK exported goods/services abroad are cheaper to buy.
- UK imported goods/services become more expensive meaning inflation pressure.
- You can buy less sangria when on holiday.
The reverse of the above is also true when interest rates rise.
- Interest Received on Savings Deposits Increases.
- Bank profits rise meaning overdraft, loans and other arrangement fees may fall to attract greater market share of a smaller market.
- Income taxes on this savings income interest increase meaning more tax revenue for government. Taxes may fall elsewhere (unlikely).
- Mortgage Repayment Costs Increase.
- Lenders may increase mortgage rates (unless fixed).
- Lenders may offer more flexible mortgages for the ‘prime’ market to attract a greater share of the ‘in demand’ borrowers.
- Lenders may offer lower income multiple (Loan to Income LTI) mortgages to ensure borrowers can afford it.
- People have less spare/disposable income which may push daily livings costs down (inflation).
- Property Prices Stabilise or may Fall
- People can usually afford to borrow less due to increased costs, so offer less when buying.
- Gilt Yields/Bond Yields (Government Borrowing Interest Rates) Increase
- Governments borrow less money are higher costs (gilt/bond yield) meaning benefit cuts and increased taxation rates.
- Capital values of gilts/bonds and fixed interest funds fall.
- Business Borrowing Costs Increase
- Less investment in business.
- Business and economic slowdown.
- Less business tax revenue for government.
- The Pound £ Strengthens
- UK exported goods/services abroad are more expensive.
- UK imported goods/services become cheaper lowering inflation pressure.
- You can buy even more sangria and a few tapas when on holiday.
