What is the Bank of England base rate? What does it mean for your money?

What is the Bank of England base rate?

The base rate, also known as the bank rate, is the UK’s central interest rate set by the Bank of England.

It is the interest rate that the Bank of England charges banks, building societies and other providers for loans and other forms of borrowing. This in turn influences the rates that are offered to consumers and determines how much it costs to borrow, as well as how much you can earn on your money.

The Bank of England uses the base rate as a tool to help keep inflation close to the Government’s target of 2%.

In general, when the base rate is lower, savings rates are lower and borrowing (on mortgages, loans etc.) is cheaper. This is designed to encourage consumers to spend their money and boost the economy.

By contrast, when the base rate is higher, savings rates tend to be higher and borrowing becomes more expensive, which is designed to deter consumers from spending, reduce demand and help to control inflation, for example.

How is the base rate set?

The base rate is set by the Bank of England’s Monetary Policy Committee (MPC). The committee is comprised of nine members, including:

• The Governor of the Bank of England
• Deputy Governor for Monetary Policy
• Deputy Governor for Financial Stability
• Deputy Governor for Markets and Banking
• The Bank of England’s Chief Economist
• Four external members appointed by the Chancellor of the Exchequer.

The committee meets approximately every six weeks to discuss the economic situation and vote on whether to change the base rate.

How do base rate changes affect savings?

The base rate affects the interest rate that banks, building societies and other providers pay on their savings accounts.

As a rule, savings rates typically follow the direction of the base rate so, when it increases or falls, savings rates should go up or down accordingly. This means savers should benefit when the base rate increases.

It particularly influences variable savings accounts, such as easy access and notice accounts, as providers can adjust the rate on these accounts when they choose. However, with other factors also determining where providers set their savings rates, an increase or cut to the base rate may not always affect the interest rate on your account.

The base rate can also influence the pricing of fixed rate savings accounts, but not as directly as variable accounts.

Existing fixed rate savings accounts won’t be affected by any base rate changes as the interest rate is fixed for the specified number of months or years. This can make these accounts an appealing option if savings rates are expected to drop as your money will be protected from these cuts for the specified term.

However, providers will factor in any changes to the base rate (and where it is predicted to go in the future) when setting the interest rate on their fixed rate accounts. So, if the base rate is cut and is expected to continue falling over the coming year, interest rates on fixed rate bonds are likely to be on a downwards trend.

How do base rate changes affect mortgages?

Mortgage rates generally follow the overall direction of the base rate, but the correlation between the two isn’t necessarily direct as lenders look at swap rates and a range of other factors when pricing their deals.

This means that, even if the base rate drops, mortgage rates could stay the same or even increase in the short-term, depending on what else is happening in the UK (and further afield). However, after a base rate cut or increase, the overall trend of mortgage rates is likely to follow suit over time.

Variable rate mortgages are most influenced by the base rate, particularly tracker rate mortgages.

As the name suggests, tracker mortgages track the direction of the base rate. This means, if the base rate increases or drops by 0.25%, the interest rate on a tracker rate mortgage will also rise or fall by 0.25%.

Even though all variable rate mortgages, including standard variable rates and discounted variable deals, are influenced by the base rate, they are not so directly linked to it as tracker rate deals. For example, while lenders may lower their standard variable rate after a base rate cut, it may not be by the same percentage.

Fixed mortgage rates have even less of a direct link to the base rate, but lenders will still consider it when setting the price of their new deals.

However, anyone currently with a fixed rate mortgage won’t be immediately affected by any changes to the base rate as the interest rate (and their monthly payments) won’t change for the agreed term.

How do base rate changes affect other forms of borrowing?

As with mortgages, the base rate can influence interest rates on loans, credit cards and overdrafts.

This means if the base rate rises or falls, interest rates on these forms of borrowing may start to trend up or down respectively. However, they are not so closely linked to the base rate as variable mortgages and any changes may be gradual, so a base rate cut won’t automatically mean that borrowing immediately becomes cheaper.

It’s also worth bearing in mind that, if you’re currently paying off a personal loan with a fixed interest, any changes to the base rate won’t affect your agreement. Your interest rate and your monthly payments will remain the same.

Bank of England base rate history

The Bank of England was founded in 1694, and a central interest rate (or base rate) has existed in the UK ever since.

The base rate was particularly high during the 1970s and 1980s, as it peaked at 17% in November 1979.

It gradually dropped to sit at around 4-5% in the years leading up to 2008 when, after the financial crash, it plummeted to 0.50% in early 2009. The base rate remained at this level until 2016, then fluctuated slightly over the following years.

In 2020, the base rate dropped to a record low of 0.10% in response to the COVID pandemic, where it stayed until December 2021.

During this period when the base rate was low, borrowing was relatively cheap, but savings rates were also extremely low.

From the end of 2021, the Bank of England steadily increased the base rate to try to limit inflation (which was rising). The base rate reached a 16-year high of 5.25% in August 2023, where it remained for one year before the Bank of England started gradually reducing rates again.