Interest is what you pay for borrowing money, and what banks pay you for saving money with them.
Interest rates are shown as a percentage of the amount you borrow or save over a year. So if you put £100 into a savings account with a 1% interest rate, you’d have £101 a year later.
Video on why interest rates matter.
Bank Rate is the single most important interest rate in the UK. In the news, it's sometimes called the ‘Bank of England base rate’ or even just ‘the interest rate’.
Our Monetary Policy Committee (MPC) sets Bank Rate. It's part of the Monetary Policy action we take to meet the target that the Government sets us to keep inflation low and stable.
Bank Rate determines the interest rate we pay to commercial banks that hold money with us. It influences the rates those banks charge people to borrow money or pay on their savings.
If Bank Rate changes, then normally banks change their interest rates on saving and borrowing. But Bank Rate isn’t the only thing that affects interest rates on saving and borrowing.
Interest rates can change for other reasons and may not change by the same amount as the change in Bank Rate. To cover their costs, banks need to pay less on saving than they make on lending. But they can’t pay less than 0% on savings or people might not deposit any money with them.
This means that when Bank Rate comes close to 0%, how far banks pass it on to lower saving and borrowing rates reduces. And as Bank Rate starts to rise away from close to 0%, that’s likely to lead to less of a rise in saving and borrowing rates.
Next due: 17 September 2020
A change in Bank Rate affects how much people spend. And how much people spend overall influences how much things cost. So if we change Bank Rate we can influence prices and inflation. We aim to keep inflation at 2% – this is the target set by the Government.
How Bank Rate affects you partly depends on if you are borrowing or saving money.
If rates fall and you have a loan or mortgage, your interest payments may get cheaper. And, if you have savings, you may be paid less interest. If interest rates fall, it's cheaper for households and businesses to increase the amount they borrow but it's less rewarding to save.
Lower rates also tend to increase the value of wealth, such as people’s pensions or housing, compared to what they would have been.
Overall, we know that if we lower interest rates, this tends to increase spending and if we raise rates this tends to reduce spending. So, to meet our inflation target, we need to judge how much people intend to save and spend given the current interest rates. For example, if people start spending too little, that will reduce business and cause people to lose their jobs. In that case we may cut interest rates to help support spending.
During the financial crisis of 2008, people reduced their spending and many lost their jobs. We had to cut interest rates to really low levels to support spending and jobs.
Over the past few years, our economy has needed interest rates to stay very low as we recovered from the global financial crisis. But things have been changing and we have recently raised interest rates.