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 too.

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 too.

Rob Silvey
Finances expert
minute read
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Posted 09 JULY 2020 Last Updated 26 MAY 2022

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 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 that they pay in interest on savings.

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 mean less borrowing, lower rates encourage more borrowing.

What is the Bank of England base rate used for?

As the Bank of England charges the 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 that they can cover their costs and make a profit.

The closer the base rate gets to 0%, it becomes more difficult 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. So it can, for example, 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 things.
  • Saving: 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.

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.

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?

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 rose in early 2022 to combat rising inflation following a period of historic lows during the coronavirus pandemic.

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 have base rates been since the financial crisis?

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 went as low as 0.25% and as high as 0.75%.

Then, at the start of the coronavirus pandemic in March 2020, it went to a historic low of 0.1%. As the UK and the world has come out of the pandemic, spending has increased and inflation has gone up, prompting the Bank of England to increase interest rates.

Check the current base rate on the Bank of England website

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