The Bank of England is responsible for keeping the UK’s economy on the right track. One of the ways we do this is through monetary policy.
We operate monetary policy by moving Bank Rate up and down and, in certain circumstances, we also use supplement this with measures such as quantitative easing.
What is Bank Rate?
Bank Rate is sometimes referred to as ‘the interest rate’, but it’s not quite the same as the interest you pay on debts or earn on savings.
Bank Rate is the interest rate we charge when we lend to commercial banks. This influences the interest that banks pay to customers on savings and the interest they charge on mortgages, credit cards and other borrowing.
Lower interest rates encourage people to spend more, increasing inflation, and higher interest rates do the opposite.
What is inflation?
Inflation is the increase in prices over time. If prices are decreasing, this is called deflation.The Government sets us a target rate of inflation, which we aim to achieve through implementing monetary policy. The target rate is currently 2%, which means that prices should increase by 2% in a year compared to the previous year.
What is quantitative easing?
Quantitative easing is sometimes called ‘printing money’, but it doesn't involve printing new banknotes. When we carry out quantitative easing, we create new money electronically and use it to buy bonds. This ultimately encourages spending and investment, helping us to meet our 2% inflation target.
For more in-depth information on how quantitative easing works, watch our video
and read our FAQs