Bank of England: What are interest rates?
Setting interest rates is one of the many ways the Bank of England can try to control the UK economy.
If interest rates go up, it can make borrowing more expensive - especially for homeowners with mortgages - but it can also give savers a better return.
How does the Bank of England set interest rates?
The Bank of England uses changes in the interest rate at which it will lend money to other banks for a single day.
This is known simply as Bank Rate.
Bank Rate is also known as the Bank of England base rate.
By manipulating this rate, the Bank hopes to keep prices stable and keep the economy growing at a steady pace.
How does Bank Rate work?
If Bank Rate goes up, it is intended to encourage high street banks to put up the interest rates they charge individuals and businesses.
Higher interest rates mean people get a better return on their savings, which should encourage them to save rather than spend.
Encouraging people to save should slow the increase in prices of everyday goods. With fewer buyers in the market, sellers will find it hard to put their prices up.
On the other hand, cutting interest rates makes it cheaper to borrow money and people get less return on their savings. This should encourage spending and help prices rise a little faster.
How do interest rates affect me?
People who have paid for their home with a mortgage are the most affected by interest rate changes.
Some mortgages - called "trackers" - are directly linked to Bank Rate. If the rate goes up, the mortgage will go up too, and if it falls they usually fall too.
The interest rates of other types of mortgages will also be influenced by Bank Rate, but less directly.
It also affects the interest rates people earn on their savings. The recent period of low Bank Rates has seen savings rates fall sharply too.
Bank Rate will also affect the interest rates charged on other forms of credit, such as credit card loans, bank loans, and car loans. So even if you don't have savings or a mortgage, changes in interest rates could still have an impact on your finances.
How are interest rates decided?
Bank Rate is set by a team of nine economists, called the Monetary Policy Committee (MPC). It meets eight times a year to consider data about how the economy is performing.
Their decision whether to change Bank Rate is always published at 12;00 on a Thursday afternoon.
What is the inflation target?
The Bank of England will raise or lower Bank Rate to help maintain its 2% inflation target.
Inflation is the rate at which prices are rising - if the cost of a £1 jar of jam rises by 5p, then jam inflation is 5%.
If prices are rising faster than 2% a year, the Bank will consider putting the Bank rate up.
If prices aren't going up fast enough, it may cut Bank Rate.
How has Bank Rate changed recently?
After the 2008 global financial crisis, the Bank of England was afraid that the economy would crash, so it cut Bank Rate to 0.5% in 2009.
This was good news for many mortgage borrowers, who found their borrowing costs much lower than they had expected.
The Bank of England wanted to do even more to stimulate the economy, so it tried a new approach to lower borrowing costs by creating new money electronically - called quantitative easing.
Since then, the Bank cut rates twice. In 2016, it cut Bank Rate when the economy faced uncertainty following the referendum vote to leave the European Union.
And in 2020, it cut Bank Rate to its lowest-ever level of 0.1% as the coronavirus pandemic caused the biggest economic slowdown for centuries.
Until now the Bank of England has never cut Bank Rate below zero, though this approach has been considered recently.
Will interest rates go up soon?
Inflation is rising above the Bank of England's 2% target, as the economy rebounds rapidly from the pandemic.
Normally this would mean that the Bank would consider a rate rise to help bring it back to 2%.
However, the Governor of the Bank of England Andrew Bailey has said that rising inflation is a "temporary feature" of the recovery.
The Bank is unlikely to put interest rates up soon unless it sees signs that this above-target inflation is becoming a longer-term problem.
