What the Bank of England base rate means for current accounts

When it comes to official money talk and sentences that involve the words ‘Bank of England’, ‘base rate’ and ‘inflation’, how many of us can honestly, hand on heart say we understand what’s being discussed? We might have a hazy idea but could we confidently apply that vague understanding to our everyday finances? Whether you want to brush up on your existing knowledge or just want someone to explain it plain and simples, then this is the article for you.

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What is the Bank of England base rate?

Our economy makes things tick, if it works then we all have jobs, won’t go hungry and can buy lots of shiny, new things. If it doesn’t work, well, then it’s pretty miserable. So 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 that keeps inflation at its target of 2% ensuring that the economy ticks along nicely.

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How does the base rate influence my finances?

The base rate is the rate of interest that the Bank of England pays banks and building societies for the savings that they hold with it (a bank for banks!). This in turn influences the interest rates banks and building societies give us when we borrow or save.

So a low base rate of interest is a good thing if you want to borrow money (think 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 stuff – everyone’s happy; except that is for savers. Savers have a hard time when the base rate is low, because it means the interest paid on money they have stashed away, tends to be low too.

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So, the impact on my current account is…

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.

Any savings accounts you have will also feel the effects as banks and building societies amend interest rates to bring them more in line with the base rate and fellow competitors.

How often does the base rate change?

A committee meet on the first Thursday of every month to reassess and decide if a change in the base rate is needed. The base rate is there is to keep things in check and it’ll change as and when the Bank of England feels it’s right to do so. The change in base rate down to 0.25% in August 2016 was the first time the rate has been changed in seven years – it’s also the lowest it’s ever been (the highest was a ginormous 17% in 1979).

What might happen in the future?

There are rumblings that the base rate will be cut again in the not too distant future.

In theory the base rate could go into negative numbers as it has done in some European countries. If they did what would the impact be? It would be unlikely that savings accounts or ISAs would be impacted however it could spark a change to current accounts and business customers, and those with mega bucks may be hit.

Of course – when it comes to your mortgages and credit, don’t expect the interest to suddenly vanish. Interest rates on lending are generally set higher than the base rate (even if they do track it) so it’s unlikely to ever fall far enough below 0 to mean the bank pays you– bad luck.

Saving or borrowing?

Whether you’re thinking about saving or spending, we can help you find a great deal – from mortgages to savings and current accounts it’s all right here at comparethemarket.com

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