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Published 08 February 2022

How the Bank of England Base Rate Affects You

The Bank of England base rate can influence how you manage your finances. A high base rate is good for savers, while a low base rate is good for borrowers.

What is the Bank of England base rate?

The Bank of England (BoE) base rate is the interest rate the UK’s central bank charges high street banks and other lenders to borrow 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’s Monetary Policy Committee (MPC), which has nine members, meets regularly to discuss the state of the economy and eight times a year (roughly every six weeks) agrees on policy based on its findings. The interest rate it sets is designed to help keep prices affordable, companies afloat, and people in jobs.

When times are hard, most of the population will be hesitant to spend, impacting company sales and forcing them to make job cuts. In such cases, the BoE would attempt to boost spending by lowering its base rate, effectively making it less advantageous to save and cheaper to borrow.

The idea is that if the public starts spending again, demand for goods and services will increase, creating new jobs and stimulating the economy.

At the same time, the BoE must ensure that spending doesn’t spiral out of control. If everyone keeps buying stuff, it could lead to shortages, companies ramping up prices, and everyday items becoming unaffordable. The bank’s objective is to keep inflation at around 2%. Should prices rise more than this each year, alarm bells go off and the base rate is raised.

» MORE: Hyperinflation explained

Higher interest rates have the opposite effect, increasing borrowing costs and making saving money more lucrative. This should ultimately prompt the nation to spend less, reducing demand for goods and services and preventing prices from climbing.

How does the Bank of England base rate impact on personal finances?

The base rate is the main driving force behind what banks charge consumers and businesses for loans, including credit cards and mortgages, and what returns we get for putting our money away in savings accounts.

If the rate is cut, you’ll probably pay less interest on money borrowed but you’ll also receive a smaller reward on any money you have tucked away. Conversely, should it rise, lenders will likely charge you more for the privilege of borrowing and offer greater incentives to save your money with them.

Changes to the base rate can have a massive impact on how we manage our finances, so it’s important to keep tabs on what the BoE is up to, as well as the general state of the economy.

Knowing what the current base rate is can help us to determine how much we should be paying on a loan or getting for our savings. And having a rough idea of whether borrowing costs will be lowered, raised or left the same enables us to plan ahead and secure the best deals on the products we use.

» MORE: How rising interest rates could affect your finances

A decade of low interest rates

In March 2009, after the financial crisis, the BoE cut UK interest rates to a new low of 0.5%, hopeful that this would encourage consumers and businesses to save less, spend more, and essentially pull the economy out of one of the worst recessions on record. While these measures worked to some extent – particularly in boosting employment levels – wealth and general spending patterns haven’t really fully recovered, partly as a result of other events that unfolded later.

Both Brexit and then the Covid-19 outbreak shook confidence and forced the bank to cut the base rate twice more, all the way down to 0.1% in March 2020. Since December 2021, the BoE has begun to increase the interest rate from this record low in an effort to tackle rising inflation.

» MORE: What is inflation?

Image source: Getty Images

About the Author

Daniel Liberto

Daniel is a freelance finance journalist. He has written and edited news, deeper analysis features, and opinion pieces for the Financial Times, Investopedia and the Investors Chronicle.

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