ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A retailer funds its inventory with a variable-rate bank overdraft. The central bank unexpectedly raises its base rate. Which is the MOST likely direct impact on the retailer?
The retailer's finance costs will rise and customer spending may weaken. A variable-rate overdraft reprices when the base rate increases, so interest charges go up straight away, and higher rates generally discourage consumers from borrowing and spending, which can reduce retail sales.
- AIts finance costs rise and customer spending may weakenCorrect
- BIts finance costs fall because the overdraft becomes cheaper
- CIts finance costs are unaffected because overdrafts are short-term
Explanation
Variable-rate borrowing reprices when the base rate changes, so interest costs rise immediately. Higher rates also tend to reduce consumer borrowing and spending, hurting retail sales. Short-term maturity does not protect a variable-rate facility.
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