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 depend on if you are borrowing or saving money.
If rates fall and you have a loan or mortgage, then your interest payments may get cheaper. And, if you have savings, you may be paid less interest. If interest rates fall, it is also cheaper for households and businesses to increase the amount they borrow and 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’ve been.
Overall we know that if we lower interest rates, that tends to increase spending and if we raise rates that 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 then 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, people reduced their spending and many lost their jobs. We had to cut interest rates to exceptionally 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. Find out more in our Inflation Report summary.