Interest rates and Bank Rate

We set Bank Rate to influence other interest rates. We use our influence to keep inflation low and stable.

What are interest rates?

Interest is what you pay for borrowing money, and what banks pay you for saving money with them.

Interest rates are shown as a percentage of the amount you borrow or save over a year. So if you put £100 into a savings account with a 1% interest rate, you’d have £101 a year later.

Why do interest rates matter to me?

What is Bank Rate?

Bank Rate is the single most important interest rate in the UK. It is sometimes called the ‘Bank of England base rate’ or even just ‘the interest rate’ in the news.

Our Monetary Policy Committee (MPC) sets Bank Rate. It is part of the Monetary Policy action we take to meet the target that the Government set us to keep inflation low and stable.

Bank Rate is the interest rate we pay to commercial banks that hold money with us. It influences the rates those banks charge people to borrow money or pay on their savings.

How Bank Rate affects your interest rates

If Bank Rate changes then normally banks change their interest rates on saving and borrowing. But Bank Rate isn’t the only factor that affects interest rates on saving and borrowing.

Interest rates can change for other reasons and may not change by the same amount as the change in Bank Rate. Banks need to pay less on saving than they make on lending in order to cover their costs. But they can’t pay less than 0% on savings or people may not deposit any money with the bank. 

That means when Bank Rate is lowered close to 0% the extent to which that’s passed onto lower saving and borrowing rates diminishes. And as Bank Rate starts to be raised away from close to 0% that’s likely to lead to less of a rise in saving and borrowing rates.

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.

This page was last updated 17 September 2018
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