The Bank of England sets the UK’s base interest rate, Bank Rate. It’s also sometimes known simply as ‘the interest rate’. Bank Rate influences the level of all other interest rates in the UK.
Bank Rate was almost zero (0.1%) at the beginning of December 2021. It is 5.25% 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, in order to support the UK economy.
Higher interest rates increase the return on savings. They also make the cost of borrowing more expensive.
Higher interest rates help to slow down price rises (inflation). That’s because they reduce how much is spent across the UK.
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 to happen.
People have told us directly that they are finding higher mortgage and loan payments very hard. They also ask if higher interest rates are the best option we have.
The answer is yes. The UK 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.
