So, to meet our inflation target, we need to judge how much people intend to save and spend given the current interest rates. Overall, we know that if we lower interest rates, this tends to increase spending and if we raise rates this tends to reduce spending. Lower rates also tend to increase the value of wealth, such as people’s pensions or housing, compared to what they would have been. If interest rates fall, it's cheaper for households and businesses to increase the amount they borrow but it's less rewarding to save. And, if you have savings, you may be paid less interest. If rates fall and you have a loan or mortgage, your interest payments may get cheaper. How Bank Rate affects you partly depends on if you are borrowing or saving money. Why does Bank Rate influence spending and inflation? We aim to keep inflation at 2% – this is the target set by the Government. So if we change Bank Rate we can influence prices and inflation. And how much people spend overall influences how much things cost. How changes in Bank Rate affect the economyĪ change in Bank Rate affects how much people spend. 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. This means that when Bank Rate comes close to 0%, how far banks pass it on to lower saving and borrowing rates reduces. But they can’t pay less than 0% on savings or people might not deposit any money with them. To cover their costs, banks need to pay less on saving than they make on lending. Interest rates can change for other reasons and may not change by the same amount as the change in Bank Rate. But Bank Rate isn’t the only thing that affects interest rates on saving and borrowing. If Bank Rate changes, then normally banks change their interest rates on saving and borrowing. How Bank Rate affects your interest rates It influences the rates those banks charge people to borrow money or pay on their savings. 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.īank Rate determines the interest rate we pay to commercial banks that hold money with us. Our Monetary Policy Committee (MPC) sets Bank Rate. In the news, it's sometimes called the ‘Bank of England base rate’ or even just ‘the interest rate’.
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