Table of Contents
- What is the Bank of England base rate?
- What is the Bank of England base rate used for?
- How does the Bank of England base rate affect mortgages?
- How does the base rate of interest affect other borrowing costs?
- How does the Bank of England base rate affect savings?
- How is the Bank of England base rate calculated?
- Bank of England base rate FAQs
What is the Bank of England base rate?
The Bank of England (BoE) base rate is the interest rate that the UK’s central bank charges high street banks and other lenders when borrowing money. Expressed as a percentage, it influences how much consumers and businesses pay for taking out a loan, or receive for depositing their cash in savings accounts.
What is the Bank of England base rate used for?
The Bank of England base rate is primarily used to control inflation, aiming to keep it at a target level of 2%. Adjusting the base rate helps to stabilise the UK economy, particularly when navigating economic shocks such as the Covid-19 pandemic, which affected the availability of products and services, and Russia’s invasion of Ukraine, which led to higher energy costs.
Interest rates can influence consumer spending in two important ways:
- When times are hard, many people will be wary of spending their money. This can hurt sales, leading to companies cutting jobs. In this scenario, lowering the base rate makes it cheaper to borrow and encourages people and businesses to spend, while making it less advantageous to save. As a result, increased spending means that demand for goods and services will rise, creating new jobs and stimulating the economy. However, it’s also important to ensure that spending doesn’t spiral out of control, as this could lead to shortages and price increases.
- Higher interest rates have the opposite effect, increasing the cost of borrowing and making saving more lucrative. Increasing the base rate can prompt businesses and consumers to spend less, reducing demand and preventing prices from rising too fast.
How does the Bank of England base rate affect mortgages?
Changes to the base rate can have an impact on mortgages, which could affect your outgoings and your standard of living. This is because, when interest rates are high, payments on mortgages and loans tend to increase, which means people have less disposable income.
When the rate is cut, you’ll probably pay less interest on the money you’ve borrowed – which means your payments should go down. When the rate goes up, the opposite happens, and you may find that your payment increases. However, this depends on the type of mortgage you have.
Fixed rate mortgages
If you have a fixed rate mortgage, changes to the Bank of England base rate won’t affect your payments until your fixed term comes to an end.
Tracker rate mortgages
Changes to the Bank of England base rate mean that the rate you pay for your tracker rate mortgage could change. So, if the rate goes up, you could pay more. If it goes down, you could pay less.
Standard variable rate mortgages
This is the rate you pay when your fixed rate or tracker rate mortgage changes. This can change at any time, and isn’t necessarily influenced by changes to the Bank of England base rate.
How does the base rate of interest affect other borrowing costs?
The base rate influences what banks charge consumers and businesses for borrowing money, including loans, credit cards and mortgages. When the rate is cut, you may pay less interest on what you’ve borrowed, but when the rate goes up, you could pay more.
As a result, changes to the base rate can mean a lot for your finances – but not always. This is because most loan interest rates are fixed, and credit card lenders aren’t obliged to cut their interest rates if the base rate goes down, and may sometimes make these changes gradually, if at all.
How does the Bank of England base rate affect savings?
When the base rate rises, some people with savings earn more interest, making saving a more appealing prospect than spending. However, this depends on the type of savings account you have:
Fixed rate accounts
If you have a fixed rate savings account or ISA, then the amount of interest you earn won’t change until the fixed term ends, regardless of whether the base rate rises or falls.
Variable rate accounts
When the Bank of England lowers the base rate, banks and building societies often reduce the amount of interest they pay on these accounts. When the base rate rises, you can expect higher returns. Your account provider will usually contact you to notify you of any changes to your interest rate.
How is the Bank of England base rate calculated?
The base rate is set by the Monetary Policy Committee (MPC), which meets eight times a year (around every six weeks) to make a decision on interest rates. It publishes the Monetary Policy Report every three months, which outlines the economic analysis used to make these decisions.
When making their decision, the MPC considers the current state of the economy along with recent global developments, and what is expected to happen in the coming months. In order to do this, they look at how quickly prices are rising, how the UK economy is growing, and how many people are in work.
Bank of England base rate FAQs
How often does the base rate change?
The Bank of England’s Monetary Policy Committee (MCP) reviews the base rate eight times each year, or around every six weeks. The base rate isn’t necessarily changed each time, but there can also be emergency meetings if required, as was seen after the 2008 financial crisis.
What is meant by the base rate?
The Bank of England base rate, sometimes known as the ‘bank rate’, is the most important interest rate in the UK. It’s the interest rate that the Bank of England charges other banks and financial institutions when they borrow money, so when the base rate changes you may find that the interest you’re charged for borrowing, and the interest you’re paid for saving, both change too.
What is a reasonable rate of interest?
Interest rates vary over time, and also depend on whether you’re borrowing or saving. As a guide, a good interest rate is usually considered to be close to the Bank of England base rate. However, different lenders offer various rates of interest, and this also varies depending on the type of product, such as mortgages, personal loans, or fixed-term or easy-access savings accounts.
Who decides the base rate?
The Bank of England base rate is decided by the Bank of England’s Monetary Policy Committee (MCP). They meet around every six weeks to assess the UK economy and decide on policy adjustments, including changes to the base rate.
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