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What the Bank of England base rate means for current accounts

What the Bank of England base rate means for current accounts

Understanding how the Bank of England base rate and inflation affect our personal finances can be tricky – use our guide to brush up on your existing knowledge and become savvier with your finances.

Tom Harrison
Content writer
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Posted 09 JULY 2020

What is the Bank of England base rate?

The Bank of England base rate is the official rate of interest that the Bank of England charges banks for secured overnight lending. The Bank of England wants to keep the economy on an even keel and one of the ways that it does this is by setting a base rate of interest. The reason for this is to keep inflation at its target of 2% - in simple terms, to ensure the economy is stable.

How does the base rate influence my finances?

As the Bank of England charges the banks for lending, this in turn influences the interest rates banks and building societies give us when we borrow or save.

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 things.

Saving: However, a low base rate of interest 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.

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.

How often does the base rate change?

The Bank of England base rate is set by the Bank of England’s  Monetary Policy Committee (MPC), normally eight times a year. The base rate is there to keep things in check and it changes as and when the Bank of England feels it is right to do so. The base rate was reduced to 0.1% in March 2020, due to the coronavirus pandemic.

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