Changes in TAXation and low interest rates affect businesses differently.
Generally, businesses that produce non-essential products such as fancy electronic gadgets, luxury overseas holidays, sports cars, expensive jewelry, etc. are the most affected. It is simply because people can live and survive without those luxury goods and services.
Businesses that produce essential goods and services (normal products and inferior products) such as food and water, clothes, medications, etc. are the least affected by such changes. It is simply because people cannot live and survive without those essential goods and services. People will need to buy them no matter how expensive they become.
Impact on customers:
With low interest rates, the cost of borrowing money decreases, so people will borrow more from the bank. People will have less incentives to save, therefore they will spend more money.
- Lower disposable incomes. A decrease in interest rates is likely to increase consumption and investment expenditure, therefore being an encouragement to businesses that will face higher demand leading to higher sales revenue. If consumers borrowed money to buy homes, then their available incomes would be increased. Therefore, demand for goods will increase because consumers will have more money to spend.
- More new loans. Borrowing money from the bank is now more attractive because households face lower interest repayments on their loans. People’s disposable income after all interest-bearing loans have been paid is increased.
- Existing loans cheaper. Those households with existing credit card bills, personal loans and house mortgages now face decreasing interest repayments, and may increase their overall spending.
Impact on businesses:
With low interest rates, the cost of borrowing money decreases, so businesses will borrow more from the bank. Businesses will have more capital to invest for expansion.
- Higher demand for products. A decrease in interest rates stimulates consumer borrowing and this increases demand for goods bought on credit, e.g. houses, cars, home appliances, electronics, etc. If consumers borrowed money to buy homes, then their available incomes would be higher. Therefore, demand for goods will increase because they will have more money to spend. Consumers will be willing to borrow money to buy expensive items, therefore companies which make luxury products will face higher demand.
- Faster business expansion. Managers may speed up decisions to expand their businesses using borrowed money. Therefore, there will be more business activity in the country. Also, because of higher retained profits, companies will have more of their own resources to invest back into the business.
- Higher profitability. A decrease in interest rates decreases interest costs and increases profits for businesses that have very high debts. Companies with existing corporate loans will have to pay back less interest to the banks, so their Net Profit After Interest and TAX will be higher. Therefore, dividends and retained profits will increase.
Impact on the country:
Low interest rates in the long term, may lead to faster economic development.
- Faster economic growth. Increased business activity will lead to fast economic growth.
- Less savings from foreigners. Low rate of return from savings will discourage individuals and financial institutions from other countries to invest their money with the banks in the domestic country. A decrease in interest rates tends to lower demand for the currency since foreign investors are not attracted by better returns on their savings. If China has relatively lower interest rates than the U.S., then demand for Renminbi would tend to decline thereby decreasing the price of the Chinese currency. Therefore, Renminbi will depreciate against USD.
- Depreciation of local currency. Lower interest rates in one country will discourage foreign banks and individuals to deposit capital in that country causing lower demand for that country’s currency, so the exchange rate will decline. This weakens the national currency and leads to exchange rate depreciation.
- Higher price of imports. Lower interest rates in one country will discourage foreign banks and individuals to deposit capital in that country. It will cause lower demand for this country’s currency, so the exchange rate will decline. This will make imports more expensive.
- Cheaper price of exports. Lower interest rates causing depreciation of the domestic currency will make the price of exports to be relatively cheaper, therefore it will likely increase the demand from abroad for exported products. Hence, lower exchange rates tend to be a benefit for domestic export businesses in the long run.
