Interest rates explained
This content applies to England only.
Ten things you need to know about interest rates
What is the Bank of England Bank Rate?
The Bank of England Bank Rate – often simply called the base rate or interest rate - is the rate that the Bank of England charges when it lends money to financial institutions like banks and building societies. So a 1% base rate means that the bank charges you £1 for every £100 you borrow.
How is it set?
Interest rates are set by the Bank of England’s Monetary Policy Committee (MPC). They meet every month to decide if the base rate should go up, down, or stay the same.
How does it affect banks individual rates?
When the base rate changes, financial institutions often change their rates too – on all sorts of products from mortgages and credit cards to savings accounts and business loans. They usually add on extra to the base rate when they lend you money.
What is the base rate now?
It’s at an all time historical low, and has been for nearly two years:
Is this low?
Base rates averaged around five percent for much of the late nineties and most of the noughties. Following the global economic crisis, they were lowered dramatically, moving down from about five per cent at the start of 2008 to an all time low of 0.5 percent in March 2009. They have not been changed since.
How does this affect people’s finances?
Many homeowners have benefitted from very low interest rates, particularly those with variable rate or tracker mortgages, where monthly repayments move with the Bank Rate. But savers have seen less return on their investments.
What will mortgage lenders do when interest rates go up?
If the base rate changes, you won’t necessarily see an immediate change in your monthly mortgage repayments. It all depends on what kind of mortgage you have – a fixed rate, standard variable rate, tracker, or other type – and how your lender resets rates.
How does the Bank set the rate?
The MPC consider a wide range of economic factors before they decide how to set the rate. Inflation – i.e. rises in the price of goods of services – is a particularly important factor. If inflation rises too much too quickly, the effects on the economy can be negative. Higher interest rates can help to slow inflation.
Where does inflation fit in?
The target for inflation is two per cent, meaning that the price of things should not rise by more that two per cent, on average, every year. Inflation is usually measured by the Consumer Price Index, an index of the cost of all goods and services to a typical consumer. Inflation is currently at four per cent – double the target.
When will the rate rise?
Setting interest rates is complicated, with all sorts of causes and effects. Economists disagree about when rates will rise, whether they should rise, and by how much. But one thing’s for sure – they can only go up.
