Interest rates and monetary policy
Where can I find information on historical Bank Rates?
There is a spreadsheet which provides the official Bank Rate history.
What is the purpose of changing the Bank Rate?
The Monetary Policy Committee (MPC) here at the Bank of England is tasked with setting monetary policy to meet the Government’s inflation target of 2% (as measured by the 12-month increase in the Consumer Prices Index, ‘CPI’). In doing so, the MPC has to judge the outlook for the economy and inflation, and to decide what level of interest rates and other monetary policy measures will ensure inflation moves towards the target of 2% in the medium term.
Why does the Bank Rate move by 0.25%?
The Monetary Policy Committee (MPC) can change the Bank Rate by as little or as much as they feel appropriate to meet their objective. Central banks tend to change the Bank Rate by 0.25%. However, this is not set in stone, nor does it form part our interest-setting remit.
When will interest rates change?
This is very difficult to predict. Interest rates are set by the Monetary Policy Committee (MPC). The MPC sets an interest rate with the aim of meeting the inflation target. However, changes in the interest rate take up to two years to have a full effect on the economy, so the MPC has to make a judgment on how the economy will be performing in two years’ time rather than on how it is performing now.
Each member of the MPC has expertise in the field of economics and monetary policy. Members do not represent individual groups or regional areas. They are independent. Each member of the committee has a vote to set interest rates at the level they believe is consistent with meeting the inflation target. The MPC's decision is made on the basis of one person, one vote. It is not based on a consensus of opinion. It reflects the votes of each individual member of the committee.
Why can’t you set different Bank Rates for businesses and consumers?
When we change the Bank Rate, we are attempting to influence the overall level of activity in the economy in order to keep the demand for, and supply of, goods and services roughly in balance to meet the Government’s inflation target of 2%.
If the economy is booming and there is a likelihood it could overheat, the MPC would probably tighten monetary policy by increasing the Bank Rate. The idea behind this is that commercial banks pass on these increases through the interest rates they charge for all borrowing. Regardless of whether it is borrowing for businesses or on residential homes, rates will normally increase across the board, impacting monthly loan repayments. The aim of this is to discourage spending. A higher Bank Rate will also potentially mean higher rates are offered on savings, making it more attractive to save, encouraging saving and again discouraging spending. This would impact the overall expenditure across the economy by putting a downward pressure on prices, which would gradually bring down the rate of inflation in line with our target. Two different Bank Rates would not achieve this outcome.
Why is the target inflation rate 2% and not lower?
One of the reasons the target inflation rate is not lower than 2% is to allow for any errors in its measurement. Ideally we do not want the rate of inflation too close to zero, because consumer demand for goods and services may drop in anticipation of prices not increasing. This poses the risk of deflation. A target rate of 2% is more likely to achieve a positive rate of inflation than a target rate of 1%, for instance.
The target inflation rate is set by the Chancellor of the Exchequer.
Does the Bank of England make more money when it increases Bank Rate?
As the central bank of the UK, the Bank of England does not have a profit-making objective. Our statutory objective is monetary (i.e. price) and financial stability. When the Bank Rate increases, our own profits and losses from interest receipts and payments generally cancel each other out. We pay interest at Bank Rate on the reserve accounts held at the Bank of England by banks and on the majority of other accounts held here. This forms our interest expense.
For further information see our annual reports and accounts.
Does my bank have to pass on a change in Bank Rate?
Whether changes in Bank Rate are passed on to customers is entirely up to individual financial institutions. However, competition within the banking sector tends to bring this about. For us, the primary objective of changing the Bank Rate is to meet the Government’s inflation target of 2% (as measured by the 12-month increase in the Consumer Prices Index, ‘CPI’). This is what the Monetary Policy Committee (MPC) here at the Bank is tasked to do.
By changing the Bank Rate, we are able to affect overall expenditure in the economy by influencing the interest rates commercial banks offer for borrowing and saving. However, we are not able to dictate to banks the actual rates they offer.
Why does my bank charge a higher interest rate for my mortgage than the official Bank Rate?
There may be differences in the interest rates different banks charge, and it is important to remember that this is a commercial decision for the institutions in question. They will offer commercial interest rates on loans and mortgages that are higher than the Bank Rate due to the fact that they do not receive all of their funding from the Bank of England and need to derive a profit from their activities.
Monetary Policy Committee (MPC)
What is the Bank of England’s monetary policy objective?
Our monetary policy objective, through the Monetary Policy Committee (MPC), is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment.
Who appoints the Monetary Policy Committee?
Our Monetary Policy Committee (MPC) is made up of nine members – the Governor, the three Deputy Governors (for Monetary Policy, for Financial Stability and for Markets and Banking), the Bank's Chief Economist, and four external members who are all appointed directly by the Chancellor. The appointment of independent members is designed to ensure that the MPC benefits from thinking and expertise in addition to that gained inside the Bank of England.
What powers does the Monetary Policy Committee have?
As well as implementing a range of monetary policies such as quantitative easing, the Monetary Policy Committee (MPC) is tasked with setting the official Bank Rate. This is for our own market transactions with financial institutions – i.e. the rate at which we will make short-term loans to banks and other financial institutions. Changes in the official Bank Rate, of course, tend to affect the whole range of interest rates set by commercial banks, building societies and other financial institutions for their own savers and borrowers.
When does the Monetary Policy Committee meet?
The Monetary Policy Committee (MPC) currently meets eight times a year to set the interest rate. These changes follow the recommendations of the Warsh Review, and are set out in the Bank of England and Financial Services Act 2016.
Ahead of each meeting, the MPC receives extensive briefing on the economy from Bank of England staff. This includes a half-day meeting – known as the pre-MPC meeting – that usually takes place the week before the MPC's interest rate setting meeting.
The MPC meets over three days. At the first meeting, normally held on the Thursday before the MPC decision is published, members discuss their views on how to interpret the most recent economic data. At the MPC’s second meeting – the first of two policy meetings, normally held the following Monday – MPC members debate what the appropriate policy stance should be.
The MPC’s final meeting – its second policy meeting – is normally held on the Wednesday. Following further discussion on the appropriate stance for monetary policy, the Governor puts to the meeting the policy that he believes will command a majority and members of the MPC vote. Any member in a minority is asked to say what level of interest rates they would have preferred. If there is an even split between the MPC members present, the Governor has the casting vote. The interest rate decision is published alongside the minutes of the MPC’s meetings at 12 noon on the Thursday.
Quantitative easing (QE)
How does quantitative easing (QE) work?
The Bank of England electronically creates new money and uses it to purchase gilts from private investors such as pension funds and insurance companies. These investors typically do not want to hold on to this money, because it yields a low return. So they tend to use it to purchase other assets, such as corporate bonds and shares. That lowers longer-term borrowing costs and encourages the issuance of new equities and bonds. This should, in turn, stimulate spending. When demand is too weak, QE can help to keep inflation on track to meet the 2% target.
Quantitative easing does not, as is sometimes suggested, involve printing more banknotes. And QE is not about giving money to banks. Rather, the policy was designed to help businesses raise finance without needing to borrow from banks and to lower interest rates for all households and businesses.
Why has the Bank of England carried out quantitative easing (QE)?
Our programme of asset purchases (known as QE) injects money directly into the economy.
This extra money is intended to support economic activity to bring future inflation back to the target. This means that the instrument of monetary policy shifts towards the quantity of money provided rather than its price (Bank Rate). But the objective of policy is unchanged – to meet the inflation target of 2% on the CPI measure of consumer prices. It is this same commitment to the inflation target that will ensure that the Monetary Policy Committee provides a measured stimulus that does not increase the supply of money beyond what is required to meet the inflation target.
These policies are aimed at boosting spending in the economy as a whole (and improving the function of financial markets). When we inject money into the economy, we do so with purchases of high-quality financial assets. We only purchase assets for which we can be sure there are long-term viable markets and for which the risk is known to be investment grade. For this reason, we have entered into asset purchases in the secondary market, for instance with insurance companies and pension funds that own and trade in high-quality financial instruments like gilts.
Isn’t quantitative easing inflationary? Has quantitative easing worked?
Quantitative easing doesn’t involve ‘turning on the printing presses’ and flooding the economy with more banknotes, as it is sometimes portrayed. That would very likely create runaway inflation.
The objective of quantitative easing is to inject cash directly into the economy to stimulate demand and return inflation to target. At the time that quantitative easing was introduced, there was a real concern about going into a deflationary spiral, as we were in the midst of one of the worse recessions on record. With interest rates near zero and the economy stagnating, there was a real risk of low inflation or even deflation. By injecting money directly into the economy and therefore increasing spending, the aim was to push inflation back up towards the 2% target level.
It is difficult to tell if it has worked, and how well. However, economies that had programmes of QE such as the UK and the USA would appear to have fared better post-recession than those that did not.
Why have you not bought assets from the general public?
We have not undertaken asset purchases with private individuals because experience with quantitative easing in Japan suggested that cash injections made directly with the general public did not have the intended effect. This was because a substantial amount of the extra liquidity was saved rather than spent – reflecting the economic uncertainty at a time of a recession. It is also unlikely that private individuals will be direct holders of large quantities of tradable investment-grade assets.
The approach we have adopted helps to ensure that, when the time comes for the Monetary Policy Committee (MPC) to exit the quantitative easing policy and begin asset sales, it will be better placed to withdraw the money injected into the economy.
Why not give the money directly to companies or individuals?
When we buy assets under our quantitative easing programme, we receive something in return for the money we have created – typically government bonds. The idea of giving money directly to individuals without receiving anything in return, and on the basis that most of them would spend that money and thereby help the economy to grow, would be more properly a matter for the elected government, rather than the Bank of England. But, even so, the precedents for that kind of operation – what Milton Friedman would have called ‘helicopter drops’ – are not good. It may be that an operation like this would have the hoped-for effects, but it could also undermine faith in the fiscal and monetary framework. And, crucially, it cannot easily be reversed when the time comes to reduce the amount of money in the economy in order to prevent excessive inflation. In contrast, our quantitative easing policy is easily reversible when that is judged appropriate.