The Bank of England sets Bank Rate. It is also sometimes known simply as ‘the interest rate’.
It is the rate of interest we pay to commercial banks, building societies and financial institutions that hold money with us. It is also the rate we charge on loans we may make to them.
Bank Rate, therefore, influences the level of all other interest rates in the UK. When we raise it, banks will usually increase how much they charge their customers on loans (to cover the increased cost) and the interest they offer on savings. This tends to discourage businesses from taking out loans to fund investment and encourages people to save rather than spend.
Experience tells us that when overall spending is lower, prices stop rising so quickly and inflation slows down. That has started to happen in the UK. We need to make sure it continues.
The reverse happens when we reduce Bank Rate. Banks cut the rates they offer on loans and savings. That gives people freedom to spend more, which they tend to do.
Bank Rate was almost zero (0.1%) at the beginning of December 2021. It is 4.25% now.
In the years between 1975 and 2007, Bank Rate was 3.5% at its lowest point and 17% at its highest. We cut it to 0.5% during the global financial crisis in 2008 and 2009. We kept it low after that to support the economy.
People have told us directly that they are finding higher mortgage and loan payments very difficult. They also ask if higher interest rates are the best option we have.
The answer is yes. The Government sets us a target of getting inflation to 2% – and interest rates are the best tool we have to slow down price rises.
We know that interest rates are an effective tool for managing inflation because they have been used successfully across many countries and circumstances. They are effective in influencing the amount of spending in the economy and, therefore, inflation. And we can see that they are working now.