Interest Rate (IR) is considered one of the most important economic factors affecting every household, business and government across the world. As described by Parkin et al (2005), this is the opportunity cost of holding money, i.e. the price that the borrower is willing to pay for using the loan. On the other hand, it is also the compensation for the risk that lenders take in lending money. (investopedia.com, na 2003) By lenders and borrowers, it refers to individuals, companies, financial instruments and governments. IR can also be classified into nominal IR, i.e. the one declared on the financial market, and real IR, which implies the return on investment in terms of value. IR is said to be an indicator of the economic situation and also a reflection of government policy. Therefore IR fluctuations would have a large impact on different areas of the economy and it is crucial to understand what drives them and how it would affect the world. This article presents a general analysis of interest rate determination models, which are relevant to the UK economy. Subsequently, the effects of variations in IR on economic growth will be examined. Then a conclusion will be drawn to generate the key points mentioned in the paper. Among all, the state of the economy is the fundamental parameter of IR. (Toews, 2006) when an economy goes through a period of growth, IR decreases to stimulate the amount of money circulating in the market. In contrast, RI is relatively high when stagnation or recession occurs. Figure 1 illustrates the relationship between real GDP representing economic growth and RI over 40 years in the UK. In the late 1980s the UK went through a huge period of stagnation and, from the graph, the IR was high... in the middle of the chart... which are beyond the scope of the essay to discuss. Reference: Heakal R, (12 November 2003). , Investopedia Inc. Retrieved April 8, 2006, from http://www.investopedia.com/articles/03/111203.asp , (n.d.). Bank of England. Retrieved April 4, 2006, from http://www.bankofengland.co.uk/education/targettwopointzero/inflation/ratesAffectInflation.htm, (n.d.). Guru.co.uk review. Retrieved April 5, 2006, from http://www.revisionguru.co.uk/index.htm, (n.d.). 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. (n.d.). , retrieved April 6, 2006, from http://people.wwc.edu/staff/toewbr/f441/Assignments/441%20Ch02%20Assignment.htm