What is Bank Rate?
‘Bank Rate’ is the single most important interest rate in the UK. It is set by the Bank of England’s Monetary Policy Committee (MPC), normally eight times a year. It is sometimes called the ‘Bank of England base rate’ or even just ‘the interest rate’ in the news.
Official Bank Rate history Data from 1694
What is monetary policy?
Bank Rate is the rate of interest we pay on reserves held by commercial banks at the Bank of England. For this reason, banks normally pass any changes in Bank Rate onto their customers. When we raise Bank Rate, they usually increase the interest customers have to pay on borrowing and the interest they earn on savings, and vice versa.
So an increase in Bank Rate makes borrowing money more expensive and saving more rewarding. And a decrease in Bank Rate makes borrowing cheaper and saving less rewarding. Higher interest rates mean people will spend less in order to service their debts and benefit from good savings rates. This puts downward pressure on inflation. When interest rates are lower, the opposite is true.
The Bank of England has an inflation target, which is currently 2%, so we adjust Bank Rate in order to reach this.
Find out more about inflation and 2% target
There is no upper limit to the level of Bank Rate, but there is a level below which it cannot be reduced – this is known as the ‘effective lower bound’. The MPC currently judges this bound to be close to, but a little above, zero.
Why are there so many different interest rates?
The number of different interest rates available when you borrow or save can be confusing.
That is because the interest rates that commercial banks set depend on more than just Bank Rate. For loans, these other factors include the risk that the loan will not be paid back. The greater the risk, the higher the rate the bank will charge.