ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A central bank raises its base interest rate to reduce inflationary pressure. What is the most likely immediate effect on businesses?
Borrowing costs rise and investment projects become less attractive. Higher base rates make loans and credit dearer, reducing business investment and consumer credit spending, which dampens demand and inflation. Higher rates usually attract foreign capital and strengthen the currency, so a sharp fall is unlikely.
- ABorrowing costs rise and investment projects become less attractiveCorrect
- BConsumer spending on credit is encouraged, raising demand
- CThe value of the currency is likely to fall sharply
Explanation
Higher interest rates increase the cost of borrowing, so fewer investment projects meet required returns and credit-financed spending falls. Higher rates normally attract foreign capital, tending to strengthen rather than weaken the currency, so the other options are wrong.
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