Important Disclosure: The content provided does not consider your particular circumstances and does not constitute personal advice. Some of the products promoted are from our affiliate partners from whom we receive compensation.
If you require any personal advice, please seek such advice from an independently qualified financial advisor. While we aim to feature some of the best products available, this does not include all available products from across the market. Although the information provided is believed to be accurate at the date of publication, you should always check with the product provider to ensure that information provided is the most up to date.
The Bank of England has kept the Bank Rate at 5.25% (20 June 2024).
The Bank describes the Bank Rate as ‘the UK’s single most important interest rate’. Then generally referred to as the Base Rate, it last stood at today’s level in 2008.
Here’s what you need to know about the Bank Rate, why it’s so important, and what effect it has on our finances.
Free Mortgage Advice
Trussle is a 5-star Trustpilot rated online mortgage adviser that can help you find the right mortgage - and do all the hard work with the lender to secure it. *Your home may be repossessed if you do not keep up repayments on your mortgage.
Provided by Trussle
What is the Bank Rate?
The Bank Rate determines the interest rate we pay when we borrow money or have credit card debt, and how much we earn on an interest-bearing account.
It is used by the Bank of England to help control inflation – the increase in prices over time. The Bank has a mandate, set by the government, to keep UK inflation at 2%, a figure generally seen as healthy for the economy as a whole.
Over the past year, it missed its inflation target by several percentage points but inflation finally reach 2% in May, according to the Office for National Statistics.
The Bank Rate is set 10 times a year by the Bank of England Monetary Policy Committee (MPC). The MPC’s next rate-setting announcement is on 1 August 2024, when the rate is tipped to fall to from 5.25% to 5%.
Why is the Bank Rate important?
The Bank Rate is important because it influences the rates banks and building societies charge people to borrow or pay them on their savings.
If it changes, these financial institutions normally follow suit and alter their interest rates on both loans and savings products, so you’ll feel the impact differently depending on whether you are borrowing or saving.
If rates fall and you have a loan or a mortgage, your interest payments may get cheaper. And if you have savings, you may be paid less interest. If it rises, as it has done for the past year, you’ll pay more interest on debt and earn more on deposits.
How does a rate rise fight inflation?
When interest rates rise, borrowing becomes more expensive.
In theory this puts people off from spending and encourages them to save instead. As demand for goods and services drops, prices should fall, helping to reduce inflation levels.
The danger is that an excessive squeeze on spending can lead to an economic downturn because companies struggle to generate revenue.
That is why the Bank of England increased its Bank Rate incrementally – 14 times since December 2021, when it stood at just 0.1%. It reached its current level of 5.25%, a 16-year high, in August 2023.
How do interest rate rises affect mortgages?
When the Bank Rate changes, your lender should write to tell you how you will be affected and when any changes will take effect.
If you’re one of the UK’s two million mortgage borrowers with a tracker or variable rate deal, your payments will rise almost immediately following the Bank of England’s latest base rate decision.
If you have a fixed-rate mortgage, you won’t be affected by the latest rate hike until your existing deal runs out. Once you start looking for a new deal, however, you may find the rates on offer are much higher than when you last fixed.
If your fixed-rate mortgage is due to expire in the next three to six months, it could be worth looking now with a view to potentially locking in a new rate at today’s level in case rates rise further. You can do this with many lenders with no obligation to proceed.
If you consider jumping ship early from an existing home loan – for example, to take advantage of a better deal from a rival lender – make sure the savings outweigh any penalties or early exit fees for calling time on your current arrangement.
How does the Bank Rate affect savings?
In theory, a rise in the Bank Rate ought to mean savings accounts pay more interest. However, unlike mortgage providers that tend to pass a rate rise over to their borrowers at the earliest opportunity, banks and building societies are often slower to boost their savings rates.
Even once the benefits have been handed over, savings rates may be less than the current inflation level of 2%. Where this is the case, it means your savings are effectively losing money by failing to keep up with this figure – which is why it is so important to switch to an account paying a higher return if possible.
If you have money set aside, it may be worth using it to pay off debts. Or you could consider using a lump sum to make a mortgage overpayment with the aim of paying less interest over the life of the deal.
How does an increase in the Bank Rate affect other forms of debt?
Most personal loans – ie, borrowing other than mortgages – have fixed rates, which means a hike in the Bank Rate should not affect your repayments.
Interest rates on credit cards, meanwhile, are variable but aren’t necessarily linked directly to a change in the Bank Rate, so the interest rate on your credit card won’t necessarily rise.
However, if you’re taking out a new loan following a Bank Rate increase, you’ll probably be offered a higher rate than was previously available.
