How changes in Bank Rate affect the economy
A change in Bank Rate affects how much people spend. And how much people spend overall influences how much things cost. So if we change Bank Rate we can influence prices and inflation. We aim to keep inflation at 2% – this is the target set by the Government.
Why does Bank Rate influence spending and inflation?
How Bank Rate affects you partly depends on if you are borrowing or saving money.
If rates fall and you have a loan or mortgage, your interest payments may get cheaper. And, if you have savings, you may be paid less interest. If interest rates fall, it's cheaper for households and businesses to increase the amount they borrow but it's less rewarding to save.
Lower rates also tend to increase the value of wealth, such as people’s pensions or housing, compared to what they would have been.
Overall, we know that if we lower interest rates, this tends to increase spending and if we raise rates this tends to reduce spending. So, to meet our inflation target, we need to judge how much people intend to save and spend given the current interest rates. For example, if people start spending too little, that will reduce business and cause people to lose their jobs. In that case we may cut interest rates to help support spending.
What has happened since the financial crisis?
During the financial crisis of 2008, people reduced their spending and many lost their jobs. We had to cut interest rates to really low levels to support spending and jobs.
Over the past few years, our economy has needed interest rates to stay very low as we recovered from the global financial crisis. But things have been changing and we have recently raised interest rates.