This page was last updated on 6 November 2025
We began raising interest rates at the end of 2021 to help control inflation. Since then, inflation has fallen a lot and the pressures that caused the initial price rises have eased. As a result, we could start reducing interest rates in August 2024. We have made several cuts since then – the latest was to 4% in August 2025.
Spending is comparatively weak right now, but inflation is above the 2% target. We believe it has peaked and will fall from here. If inflation stays on track, we should be able to gradually reduced interest rates further. But we can't say precisely when or by how much. That depends on how things evolve. So, we will continue to monitor developments in the UK and internationally.
At the moment, we are balancing two risks: we do not want inflation to stay above the target, but do not want it to fall too low either.
Inflation might stay above 2% if administered prices (those set by regulators or the Government, eg utility bills) rise again or if firms start to charge more to cover increasing costs. There's also a chance that households and businesses will anticipate another period of high inflation. In response, they may demand higher wages and set higher prices to protect themselves against expected cost increases.
On the other hand, inflation might fall below the target if spending stays weak. This could happen if households and businesses remain cautious and choose to save more instead of spending.
We make our decision on interest rates every six weeks or so. Each time, we look at the state of the economy and recent global developments, and what we expect for the coming months. The factors we consider include:
- how fast prices are rising
- how the UK's economy is growing
- how many people are in work
We will announce our next decision on Thursday 18 December 2025. You can see our full list of upcoming dates along with links to our more detailed reports.
Current Bank Rate 4%
Next due: 18 December 2025
How do higher interest rates bring inflation down?
Interest rates affect how much people spend, and that changes how shops and other businesses set their prices.
Higher interest rates lead to higher charges on many mortgages and loans, meaning people must spend more on them and less on other things.
It also means savers get a bigger return (ie they make more money by not spending) and potential borrowers find it is more expensive to take out a loan. These things make it less attractive for people and companies to spend money.
When people spend less, businesses are less willing or able to raise their prices. When prices do not go up so quickly, inflation falls.
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The Bank of England sets Bank Rate. It is also sometimes known simply as 'the interest rate'.
It is the rate of interest we pay to commercial banks, building societies and financial institutions that hold money with us. It is also the rate we charge on loans we may make to them.
Bank Rate, therefore, affects the level of all other interest rates in the UK. When we raise it, banks will usually increase how much they charge their customers on loans (to cover the increased cost) and the interest they offer on savings. This tends to discourage businesses from taking out loans to fund investment and encourages people to save rather than spend.
Experience tells us that when overall spending is lower, prices stop rising so quickly and inflation slows down.
The reverse happens when we reduce Bank Rate. Banks cut the rates they offer on loans and savings. That gives people freedom to spend more, which they tend to do.
Bank Rate was almost zero (0.1%) at the beginning of December 2021. It is 4% now.
In the years between 1975 and 2007, Bank Rate was 3.5% at its lowest point and 17% at its highest. We cut it to 0.5% during the global financial crisis in 2008 and 2009. We kept it low after that to support the economy.
People have told us directly that they are finding higher mortgage and loan payments very difficult. They also ask if higher interest rates are the best option we have.
The answer is yes. The Government sets us a target of getting inflation to 2% – and interest rates are the best tool we have to slow down price rises.
We know that interest rates are an effective tool for managing inflation because they have been used successfully across many countries and circumstances. They are effective in influencing the amount of spending in the economy and, therefore, inflation.
Why was inflation so high?
Three things caused inflation to rise.
The first was the coronavirus pandemic. There was a large shortage of products and services, then as lockdowns eased there was suddenly huge demand for them and inflation rose. Put simply, when there's not much of something but lots of people want it, the price goes up.
We knew that wouldn't last long. But then came Russia's invasion of Ukraine, which had a large impact on energy and food prices.
For example, the war caused the supply of gas from Russia to drop significantly and gas prices rose as a result. Higher energy costs make it more expensive for businesses to produce other goods and services – so they raised their prices as well.
The third was a shortage of workers available in the UK. Thousands dropped out of the workforce after the pandemic, which raised the cost of hiring. So, some businesses put up their prices to cover those costs.
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There are two main types.
One is known as 'cost-push' inflation. This happens when there is a fall in supply of a materials or services, making them more expensive to get. This raises the cost of producing certain goods, which means manufacturers or sellers must raise prices and charge customers more.
The fall in Russian gas supply after its invasion of Ukraine is a good example of this.
The other is 'demand-pull' inflation. This happens when there is an increase in the demand for something compared to its supply. For example, if there is more money in the economy, then people will be looking to spend more. This means there may be a higher demand for goods and services than there are available. And if there is not much of something but lots of people want it, prices go up – and so does inflation.
Recent high inflation in the UK was driven primarily by higher costs. Covid-induced supply shortages, the invasion of Ukraine and lack of workers post pandemic all led to 'cost-push' inflation.
As interest rates affect the amount of spending in the economy, higher ones can neither stop these things from happening nor immediately prevent their effects.
But regardless of the cause, interest rates can help reduce the impact on inflation. By reducing the amount of demand in the economy, they can make it less likely that higher costs will lead to higher prices. It can help to reduce any 'second-round' effects of these shocks, eg when higher prices lead to people demanding higher wages, which can lead to businesses pushing up their prices and so on.
What could happen to inflation?
Inflation has come down a long way since its peak three years ago – the events that led to price rises have settled down and raising interest rates has had the desired effect.
However, we predicted that inflation would follow a bumpy path – it rose to 3.8% in July 2025. This was, in part, because of rising food prices after bad weather damaged harvests. Prices of services also increased, eg at hotels and restaurants. It was still at 3.8% in September 2025 after food prices fell but petrol price and airfare inflation rose.
We believe inflation has peaked and that it should fall back towards 2% over the next year or so.
It is very difficult to predict how the economy will evolve. Another global shock could change the situation significantly.
We will monitor this closely.
Why is the inflation target 2%?
The Government has set us this target, which is similar to that of many other countries.
It is low enough to keep price rises small but high enough to avoid the problem of deflation – which is when overall prices fall, and businesses make less money and begin to cut costs by reducing wages or staff numbers.
Since 1997, inflation has at times risen above our 2% target and at other times fallen below. But we have always brought it back.
Who makes the decision on interest rates?
A group of nine people with a variety of backgrounds are responsible for setting Bank Rate. They are members of our Monetary Policy Committee.
The MPC meets to look at the evidence and make a decision about every six weeks. Every three months, it publishes the Monetary Policy Report, which sets out the economic analysis that it uses to make its interest rate decisions.
The MPC will announce its next decision on interest rates on Thursday 18 December 2025.
Why is my loan or savings rate different to Bank Rate?
Bank Rate is the interest rate we pay to commercial banks that hold money with us. Because of that, changes in Bank Rate influence the rates other banks charge people to borrow money or pay them on their savings.
But it is not the only thing that affects interest rates on saving and borrowing. Interest rates can change for other reasons and may not do so by the same amount as the change in Bank Rate.
To cover their costs, banks normally pay less to savers than they charge to borrowers. So, there is usually a gap between interest rates on savings and loans.
