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.
Video on why interest rates matter.
Hi, my name is Geoff and I work at the Bank of England. Today I’m going to tell you about interest rates. Interest rates were cut sharply in 2009 and remain extremely low by historical standards. With rates so low for so long do they really matter anymore? Yes they do.
Whether you’re running a business or a family on a budget, interest rates continue to affect our daily lives and have a big impact on what’s left over to spend on essentials each month. For most, interest payments on a mortgage are one of the biggest outgoings. Covering the cost of spending on credit cards and pay day loans can also be a big drain. Many of those with savings rely on interest payments from the bank to provide essential income to live on. So whether you’re a saver or a borrower, the level of interest rates for you and your family, really does matter.
Bank Rate is the single most important interest rate in the UK. In the news, it's sometimes called the ‘Bank of England base rate’ or even just ‘the interest rate’.
Our Monetary Policy Committee (MPC) sets Bank Rate. It's part of the Monetary Policy action we take to meet the target that the Government sets us to keep inflation low and stable.
Bank Rate determines 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.
If Bank Rate changes, then normally banks change their interest rates on saving and borrowing. But Bank Rate isn’t the only thing 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. To cover their costs, banks need to pay less on saving than they make on lending. But they can’t pay less than 0% on savings or people might not deposit any money with them.
This means that when Bank Rate comes close to 0%, how far banks pass it on to lower saving and borrowing rates reduces. And as Bank Rate starts to rise away from close to 0%, that’s likely to lead to less of a rise in saving and borrowing rates.
Next due: 9 May 2024
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.
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.
Find out more in our explainer on how interest rates help to lower inflation.
Official Bank Rate history data from 1694