The bank rate, or ‘Bank of England base rate’, is set by the Monetary Policy Committee and is set in order to meet the 2% inflation target set by the government, in order to keep inflation low and stable. The bank rate determines the interest rate that is paid to the commercial banks invested in the Bank of England. This then influences the interest rates those banks charge people to borrow money or pay on their savings.
How Bank Rates Affects The Economy
A change in the bank rate affects how much people spend. And how much people spend then influences how much things cost, so by changing the bank rate inflation and prices can be controlled.
If the bank rate falls and you have a loan or mortgage, your interest payments may get cheaper. However, if you have savings then you are likely to be paid less interest. When interest rates fall, it’s less rewarding for households and businesses to save, but allows them to borrow more.
Lower bank rates also typically increase the value of wealth, such as a pension or house.
In conclusion, when interest rates are lower, spending increases and if we raise interest rates then spending decreases. So to meet the 2% inflation target, interest rates must be balanced in order to keep a stable economy. Otherwise, if people spend too much then items begin to lose their value due to inflation and it becomes unprofitable for businesses to produce that item, which leads to the business firing employees to recoup costs, likewise, if people spend too little then it will reduce business as people cannot afford to buy products, which then causes people to lose their jobs, causing a downwards spiral, with the fix being to cut interest rates in order to increase spending.
Current State Of The Economy
As of February 2023, the bank rate is set at 4%. This means that the Bank of England is attempting to decrease spending in order to decrease inflation. However, this also results in increased costs for money borrowing, which has resulted in colossal increases in costs for things such as buying new houses, which has increased by 10% between November 2021 and November 2022.
Bank of England raises UK interest rate to 4%
The Bank of England raised interest rates for a tenth consecutive time this month from 3.5% to 4%, but said inflation may have peaked and a recession in the UK would be shorter and shallower than previously feared.
Piling more pressure on mortgage payers and businesses struggling to pay off their loans, the Bank’s monetary policy committee (MPC) said the 0.5-percentage point rise was needed after private sector wages had risen more than the central bank’s previous forecasts.
Publishing an updated outlook for the economy alongside the rate decision, the Bank said that inflation “is likely to have peaked” and a recession would be less severe than previously predicted, but said Brexit was damaging the economy more quickly than it had anticipated.
More than 1.5 million mortgage payers are expected to suffer an average £3,000-a-year increase in interest payments when they refinance their loans this year, as well as the hundreds of thousands of households that refinanced at higher rates in 2022.
Monthly bills for households in the rental sector have rocketed, a rise that landlords are blaming on higher borrowing costs.
Written by Stephen Taylor Propaganda