What the Bank of England base rate means for our personal finances

Understanding what the Bank of England base rate is and how it, together with inflation, affects our finances can be tricky. Use our guide to brush up on your existing knowledge and become savvier about how the rate impacts us personally and the wider economy.

Written by

The Editorial Team

Experts in personal finance, insurance and utilities

Last Updated

8 NOVEMBER 2024

7 min read

What is the Bank of England base rate?

The Bank of England base rate is the official rate of interest the Bank of England charges banks and other lenders for secured overnight lending. It’s the single most important interest rate in the UK. This is because the rate at which banks can borrow influences the rates they charge their borrowers when lending, or the amount they pay in interest on savings.

In November 2024, the Bank of England base rate fell to 4.75%. This was the second drop since the start of the pandemic in March 2020.

Check the current base rate on the Bank of England website.

What is monetary policy?

The Bank of England is tasked by the UK government to keep the economy stable. To do this, the government has set the Bank the target of keeping inflation at 2%. Inflation is the measure of how prices for goods (your supermarket shop or a TV, for example) and services (such as a haircut) go up over time. This 2% target allows the economy to grow, and businesses and households to plan for the future.

To achieve this inflation target, the Bank of England uses monetary policy to influence how much money is in the economy and how much it costs to borrow. The key way it does this is by setting a base rate of interest. Higher rates usually mean less borrowing, while lower rates encourage more borrowing.

What is fiscal policy and how is it different from monetary policy?

Fiscal policy refers to the government’s decisions about taxation and spending. How well off you feel can be impacted by how much you’re paying in tax, which in turn affects how much you might be spending or saving. Fiscal policy also dictates how much the government chooses to spend on things like the NHS, education and benefits.

Fiscal policy is decided by the Chancellor of the Exchequer while monetary policy is decided by the Bank of England.

Why does the Bank of England change base rates?

The bank's role is to help keep the cost of living stable – to keep inflation at around 2%. If the rate of inflation rises above this, it will increase interest rates to help get inflation down.

Higher interest rates make it more expensive for people and businesses to borrow money and encourages them to save. This means that overall they will generally spend less. If people on the whole spend less on goods and services, prices tend to rise more slowly. That lowers the rate of inflation.

How much the Bank of England changes rates can vary. Sometimes it’ll make small changes as a course correction, but it can also make larger adjustments to send a message to financial markets and lenders about how it sees the state of the economy.

What is the Bank of England base rate used for?

As the Bank of England charges banks for lending, this in turn influences the interest rates banks and building societies, credit card providers and other lenders give us when we borrow or save. Lenders will typically charge consumers higher rates for borrowing or lower rates for savings than the bank base rate so they can cover their costs and make a profit.

The closer the base rate gets to 0%, the more difficult it is for banks to pass on any reduction in the base rate to customers while still making a profit. If people aren’t earning interest on their savings, then saving accounts become less attractive and customers might stop putting money in them.

How does the base rate influence my finances?

Any financial product that isn’t on a fixed interest rate can be affected by changes to the base rate. It can impact mortgages, car finance and savings rates and mean that, at the end of the month, you have more or less money to live on.

Borrowing: a low base rate of interest is a good thing if you want to borrow money (so that’s credit cards, loans and mortgages). It’s also great when it comes to making the economy active - the more we borrow, the more we spend and the greater demand there is for buying. A high base rate makes it more expensive to borrow, so your mortgage, loan or card will cost you more and you'll have less money to spend on everything else.

Saving: a low base rate is not such good news if you’re saving money, because it means the interest paid on your savings tends to be low too. Banks and building societies amend their interest rates to bring them more in line with the base rate and fellow competitors. A high base rate makes it more tempting to save as you'll earn interest on your cash.
Current accounts: the Bank of England’s base rate is also likely to influence the interest rate your bank gives you for any money you have sitting in your  current account. If you have an overdraft facility, then the interest rate you pay to use your overdraft may also change.

Changes to the Bank of England base rate can seriously affect your finances. When rates go up, you could find yourself paying more on your monthly mortgage payments (if you’re not on a fixed rate), credit card bills and any loans that you plan to take out. On the other hand, if rates go down, you could be paying less on your mortgage and credit cards and have more to spend, but if you rely on savings interest you’ll be worse off.

Banks and building societies tend to move more slowly on adjusting savings rates compared with loan rates. If you're on a variable rate, you'll probably find that your loan or mortgage goes up far more quickly than interest on your savings accounts.

How do interest rates impact the economy?

When rates are high and times are hard, people are reluctant to spend because they don’t know what’s round the corner. They then buy less and companies may have to lay off staff, reducing income and increasing uncertainty. In this sort of circumstance, the Bank of England might lower interest rates to boost borrowing and spending. Once businesses and the public start spending again, this boosts the economy.

When interest rates are low, companies can borrow and expand their business, keeping people in work, with money to spend. However, too much borrowing and spending can lead to product shortages, prompting companies to ramp up prices and feeding into inflation.

How often does the base rate change?

It depends on the economic situation and how stable things are. Sometimes the Bank may go years without changing rates and then may change them several times over a few months. But the Bank regularly reviews interest rates to see if changes need to be made.

The base rate is set by the Bank of England’s  Monetary Policy Committee (MPC), which normally meets eight times a year to decide what monetary policy action to take.

According to the Bank of England, it can take around two years for monetary policy to have its full effect on the economy, which is why it can be tricky to get the interest rate exactly right at all times.

The MPC has nine members who look at how the economy is working, then decide on whether the bank rate should change. The MPC publishes the results of its thinking every quarter and you can even see which members voted for change and who wanted things to stay as they are.

What's been happening to base rates over the last decade or so?

When the financial crisis hit in 2008, many people lost their jobs, and worries about the economy meant people reduced their spending. At the start of 2008, the base rate was 5.25%. By the end of the year it had been cut to 2%. In 2009 it went down to 0.5% and remained at this rate until 2016. Over the next couple of years it dipped as low as 0.25% and as high as 0.75%.

At the start of the coronavirus pandemic in March 2020, it was at a historic low of 0.1%. As the UK - and rest of the world - came out of the pandemic, the base rate began to rise as spending increased.

When Russia invaded Ukraine in February 2022, shortages of goods, raw materials and rising energy prices pushed up inflation. This prompted the Bank of England to increase interest rates to try to bring inflation back down to its target level. Between February 2022 and August 2023, the Bank of England base rate rose from 0.5% to 5.25%, the highest level in 15 years.

In August 2024, the Bank of England dropped the base rate to 5%, the first fall since the start of the coronavirus pandemic in March 2020. And in November 2024, the base rate fell again to 4.75%.

Check the current base rate on the Bank of England website.

What our expert says...

How will the Bank of England interest rate cut affect my finances?

“After the Bank of England dropped their base rate from 5% to 4.75% in November 2024, you may notice that the cost of borrowing (loans, credit cards and mortgages) is cheaper. This should be most true for people on variable rates or are looking to borrow after the rate drop.

This is because lenders look to the Bank of England base rate to inform their own interest rates.

The only people who may lose out are savers, with savings account interest rates expected to fall. However, if you’re a saver with a mortgage or other type of loan, you may still be better off overall.”

- The Editorial Team, Experts in personal finance, insurance and utilities