What are interest rates?

Last updated: 20 June 2024

An interest rate refers to the amount a high street bank or building society charges you for borrowing money, or the amount you can earn on your savings.

If you take out a mortgage loan to buy a home, the interest rate will be worked out as a percentage of the total loan amount. A change in Base Rate could mean an increase in monthly mortgage repayments, depending on which type of mortgage you have.

What is the Bank ‘Base Rate’?

The ‘Base Rate’ is set by the Bank of England (BofE). It’s the interest rate it charges to other banks and financial institutions when they borrow money. It’s one of the primary tools the Bank has to help control inflation.  

The Government sets the Bank an inflation target of 2%. The Bank had been raising interest rates to tackle high levels of inflation, which was in excess of 10% in early 2023 – way above the target. It was announced in June that inflation had fallen back to its target of 2%.

The UK interest rate, or the Bank of England’s Base Rate, is reviewed eight times a year. The Bank has a Monetary Policy Committee (MPC), which meets about every six weeks to discuss and vote on whether the Base Rate should up or down, or stay the same.

The BofE’s Base Rate influences the interest rate you’ll pay when you borrow money or have debt, such as credit card debt, or how much you will be rewarded for savings.  

But the different interest rates high street banks and building societies set for lending and savings depend on more than just Base Rate. For instance, they need to take into account the risk of a loan not being paid back by a borrower.  

The Base Rate is a major factor for lenders when they set their fixed-rate mortgages. Lenders set these rates based on the market’s view of what Base Rate will be in two, five or even 10 years’ time. These are called ‘swap rates’. 

How do changes in the Bank’s Base Rate affect the economy? 

A change in the Base Rate can affect how much people spend, save, or both. If people spend less, or save more, demand for goods and services decreases, then prices don’t rise as quickly. 

This means a change in Base Rate can impact how much things cost, and therefore the rate of inflation.

If you’re looking to get a mortgage to buy a home, or you already have a mortgage, a change in the Bank’s Base Rate could mean your monthly repayments go up or down.

What is inflation?

Inflation is the term used to describe rising prices. The rate of inflation describes the increase in prices, or the cost of living, over a period. The rate of inflation is how quickly prices are going up. 

The Office of National Statistics (ONS) calculates inflation by monitoring changes in the cost of a basket of goods and services. This is called the Consumer Price Index (CPI). Items tracked in the CPI include things like clothing, household goods, food and drinks, and housing.  

If wages and salaries don’t increase at least the same rate as the CPI, it means that in real terms, incomes are actually reducing, and household budgets can be stretched further. 

For example, if CPI, or inflation, is at 10%, and you have a pay rise of 5%, your income in real terms has reduced by 5%. 

What is the current rate of inflation in the UK?

The current UK inflation rate is 2%.

The rate of inflation can be impacted by the cost and supply of lots of different goods and services in the economy, such as energy prices.  

How does inflation impact the Base Rate?

Banks try to curb rising inflation by raising interest rates. This makes saving more rewarding and borrowing more expensive. Depending on which type of mortgage you have, this can mean an increase in your monthly repayments.  

When interest rates go up, people have less money to spend, so they tend to buy less. As demand for goods and services reduces, so does inflation.  

When inflation is high, the BofE tries to tackle this by raising interest rates. When inflation is low, prices stop rising as quickly, and interest rates go down.  

How often do interest rates change?

The Bank of England’s Monetary Policy Committee meets about every six weeks to discuss and vote on whether interest rates should go up or down, or stay the same. 

The dates of interest rate announcements in 2024 are:  

  • Thursday 1 August 
  • Thursday 19 September 
  • Thursday 7 November 
  • Thursday 19 December 

What’s the current UK interest rate?

The Bank of England’s current base rate is 5.25%. This increased on 3 August 2023, from 5% in June 2023.

How much have interest rates changed recently?

In March 2020, the Bank of England reduced the Base Rate to an historic low of 0.1% to protect the economy against the impact of the coronavirus pandemic. This remained in place until December 2021.  

In August 2023, the current Bank Base Rate was raised for the 14th consecutive time, to 5.25%. You can take a closer look below at how the Base Rate has changed in recent years.

DateBank Base Rate
2 August 2023 – present5.25%
22 June 20235%
11 May 20234.5%
23 Mar 20234.25%
2 Feb 20234%
15 Dec 20223.5%
3 Nov 20223%
22 Sep 20222.25%
4 Aug 20221.75%
16 Jun 20221.25%
5 May 20221%
17 Mar 20220.75%
3 Feb 20220.5%
16 Dec 20210.25%
19 Mar 20200.1%
11 Mar 20200.25%
Source: Bank of England

Will interest rates change again?

The MPCs will announce its next Base Rate decision at midday on 1 August 2024.

When could UK interest rates go down?

Forecasts from the financial markets are predicting that the Base Rate may be at its peak, as the Bank continues to monitor the long-term impact that consecutive rate rises are having on lowering inflation. In the absence of any unexpected shocks to the economy, it now looks like rates are going to remain higher for longer, before slowly coming back down.

To summarise…

  • The Bank of England sets the Base Rate, which influences the interest rates you’re offered for both borrowing money, and on savings
  • It’s also used as a means of controlling inflation. This is because borrowing and spending behaviours are affected by changes in interest rates, which impacts inflation
  • The Base Rate is reviewed eight times each year by the Bank of England’s Monetary Policy Committee

Please note: Rightmove is not authorised to give financial advice; the information and opinions provided in these articles are not intended to be financial advice and should not be relied upon when making financial decisions. Please seek advice from a regulated mortgage adviser.