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What are two potential macroeconomic effects of a rise in interest rate?

Firstly, a rise in interest rate could negatively impact investment within an economy. This is because the interest rate would increase the cost of borrowing and thus deter firms from taking out loans to finance/subsidise various R & D initiatives within the company. This fall in investment would result in a fall in aggregate demand and potentially deflationary pressures which have many worrying consequences.
In addition, increased interest rates may result in ‘hot-money inflows’ for the economy due to an increased return on savings. Whilst this provides banks and other financial institutions with greater liquidity it also results in the appreciation of the exchange rate due to greater demand for it. This can lead to reduced international competitiveness which inevitably worsens to the given country’s current account. An example of country which possesses a trade deficit is the UK which is a net importer of goods.



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