The Interest Rate (IT) is considered one of the most important economic factors affecting every household, business and government around the world. This is, as described by Parkin et al (2005), the opportunity cost of holding money, that is to say the price that the borrower is willing to pay for the use of the loan. On the other hand, it is also compensation for the risk that lenders take when lending money. (investopedia.com, na 2003) By lenders and borrowers, these include individuals, businesses, financial instruments and governments. IR can also be classified into nominal IR, that is, that declared in the financial market, and real IR, which implies the return on investment in terms of value. The IR is considered an indicator of the economic situation and a reflection of government policy. Therefore, IR fluctuations would have a great impact on different areas of the economy and it is crucial to understand what determines them and how they would affect the world. This article presents a general analysis of interest rate setting models, which are relevant to the UK economy. Subsequently, the effects of IR changes on economic growth will be examined. Then, a conclusion will be drawn to generate the key points mentioned in the paper. Above all, the state of the economy is the fundamental parameter of IR. (Toews, 2006) When an economy experiences a period of growth, IR decreases to stimulate the amount of money circulating in the market. Conversely, IR is relatively high in the event of stagnation or recession. Figure 1 illustrates the relationship between real GDP, which represents economic growth, and IR over 40 years in the UK. In the late 1980s the UK experienced a huge period of stagnation and according to the figure the RI was high... middle of article... discussions go beyond the scope of essay. Reference: Heakal R, (November 12, 2003). , Investopedia Inc. Retrieved April 8, 2006 from http://www.investopedia.com/articles/03/111203.asp< How Do Interest Rates Affect Inflation? >, (nd). Bank of England. Retrieved April 4, 2006 from http://www.bankofengland.co.uk/education/targettwopointzero/inflation/ratesAffectInflation.htm, (nd). Review Guru.co.uk. Retrieved April 5, 2006 from http://www.revisionguru.co.uk/index.htm, (nd). WebFinance Inc. Retrieved April 4, 2006 from http://tutorials.beginners.co.uk/finance/article/econrateParkin, M., Powell M., Matthews K, (2005). Addison-Wesley, pp 604 606Toews, B. (nd). <Chapter 2 Assignment, Determining Interest Rates>, retrieved April 6, 2006 from http://people.wwc.edu/staff/toewbr/f441/Assignments/441%20Ch02%20Assignment.htm