The UK base rate is the interest rate at which commercial banks, like Barcleys and Natwest, borrow from the Bank of England.
In theory, lower the interest rate, the cheaper loans become for borrowers, because generally, lenders will base their rates according to the base rate. Similarly, the base rate will generally determine the interest rate at which banks will set their savings account products.
Essentially, low interest rates are generally good for borrowers, but bad for savers.
Below is a graph showing the change in the Bank of England base rate since 1975.
Who determines interest rates?
The Bank of England’s Monetary Policy Committee (MPC) decides the fate of interest rates. They meet up every month and decide what the rates will be in the foreseen future.
Who forms the Monetary Policy Committee (MPC)?
The MPC is made up of the governor of the Bank, two deputy governors, a chief economist, a marketing director and four external members, appointed by the chancellor for a three year term. Each member has a vote of equal weight.
So they decide how much interest I pay?
Yes, that’s right. Initially, before 1997, it was the Treasury that set interest rates, but Gordon Brown granted the MPC powers to set rates when Labour came to power in 1997.
The idea of handing the responsibility over to the MPC was to prevent governments from using interest rates as a political tool. Additionally, to give a degree of independence between the economy and political concerns.
However, the government has the right to instruct the Bank on what rate to set when needed.
What is the main purpose of the MPC?
The Monetary Policy Committees (MPC) main role is to control inflation according to the government’s inflation target, which is set each year in the Budget.
Why do interest rates increase?
Essentially, rates are increased to control inflation. The concern is that rising prices will fuel higher pay demands which could push prices yet higher in an inflationary spiral.
Rates are increasing to encourage saving and discourage borrowing because that’s what the bank of england think will keep inflation at a sensible level.
What is inflation?
Inflation is an increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every pound you own buys a smaller percentage of a good or service. Basically, things are getting more expensive.
How do interest rates affect the housing market?
Changes in interest rates affect mortgage rates, either instantly or in the future if you are in a fixed-rate or discount deal. Depending on which way the change went, your mortgage payments will either increase or decrease.
Interest rates can also affect property prices. If interest rates rise, the property market could lose its appeal because mortgages become more expensive, consequently having direct impact on property prices. Of course, the opposite affect could happen if interest rates lower.