Answer: The Bank of England Base Rate is the rate of interest used to manage the economy, hence it is likely to change from one month to the next. The changes in the Base Rate affect other interest rates - everything from mortgage rates to the interest earned on savings accounts.
You can visit the Bank of England website by clicking here to see what the base rate is at any time.
The Bank of England regulates the economy by changing the base rate to control inflation. Each month the Bank announces whether or not it will change the base rate and to what figure.
When the Bank of England changes the base rate it is attempting to influence the overall level of expenditure in the economy. When the amount of money spent grows more quickly than the volume of output produced, inflation is the result. Changes to the base rate and therefore interest rates are used to control inflation.
The Bank of England sets a base interest rate at which it lends money to financial institutions (banks and building societies etc). This base rate then affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect other things which may affect your personal finances such as bonds and shares and the exchange rate.
A reduction in the base rate may cause interest rates to be lowered by banks making your savings earn less interest, but borrowing becomes more attractive as repayments are lower. This situation stimulates spending. The opposite occurs when interest rates are increased.
Lower interest rates can boost house prices. Higher house prices enable existing home owners to extend their mortgages in order to finance more spending.
Higher share prices are also often a result of lower interest rates and results in a raise in a households’ wealth and again can encourage spending.
Changes in interest rates can also affect the exchange rate, but the results are less predictable. In theory, an unexpected rise in the rate of interest in the UK when compared to other countries would give investors a higher return on their investments in the UK when compared to investments in other currencies which would make investing in pounds sterling more lucrative. Theoretically, increased investment should raise the value of sterling, reduce the price of imports, and reduce demand for UK goods and services abroad.
How does the Base Rate affect interest rates?
The Bank of England is the banker for the Government and all UK banks. The Bank of England predicts (fairly accurately) the pattern of money as it flows between the Government's accounts on one hand and the commercial banks on the other, and acts on a daily basis to smooth out the discrepancies which arise. For example, when more money flows from the banks to the Government than vice versa, the banks' holdings of liquid assets are run down and the money market finds itself short of funds. When more money flows the other way, the market can be in cash surplus.
In reality the banking system ends each day on a shortage of cash so, The Bank of England supplies the cash which the banking system as a whole needs to achieve balance by the end of each settlement day. Because the Bank is the final provider of cash to the system it can choose the interest rate at which it will provide these funds each day. In this way, the base rate affects the interest rate for each bank or building society in the UK and eventually that influence is passed onto the entire economy. When the Bank changes the base rate at which it will deal with banks, the commercial banks change their own base rates from which deposit and lending rates are calculated.
If you want to see if the current interest rates might make re-evaluating your mortgage a good idea, click here to read more about getting a mortgage health check to ensure that you are getting the best deal or call 0208 840 6666 and Northfields Estates would be happy to refer you to an independent mortgage broker.
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