The Bank of England (BoE) base rate, more commonly known as the “bank rate”, basically is the central interest rate set by the BoE. This is the rate at which other banks and lenders are charged as they borrow funds. Hence, the BoE base rate impacts how much all other banks charge as they lend money to the customers. As per Kavan Choksi UK, the base rate was reduced from 5% to 4.75%. in November 2024.
Kavan Choksi UK Briefly Discusses the Bank of England (BoE) Base Rate
The Bank of England Monetary Policy Commission (MPC) utilizes the base rate as a tool for controlling inflation, which is the rate at which all prices rise. The goal of the BoE MPC is to keep inflation at or close to 2%. This goal is set by the government of the United Kingdom. Inflation peaked at 11% at the end of 2022 but has now fallen to the target level of 2%.
Increasing the BoE base rate discourages spending and encourages saving. On the other hand, reducing the rate can encourage spending and result in a lower appetite for saving. Hence, when the BoE base rate does change, it influences how much people across the country spend, and therefore, how much things cost. The BoE base rate has the potential to change every six weeks in the MPC meetings. The MPC may even add emergency meetings in case they feel it is necessary. One must however understand that an MPC meeting does not guarantee a change in the BoE base rate.
The Bank of England MPC considers the following at each of its meetings:
- The speed at which prices are rising
- How many people in the UK are working
- The current state of the UK economy and how it is growing
Based on the factors mentioned above, the BoE MPC chooses to vote whether a change in the central interest rate is necessary or not. As per Kavan Choksi UK, the BoE base rate has an expansive impact on the economy. It can influence borrowing costs, saving incentives, and more. When the BoE changes its base rate, it impacts consumer borrowing costs, such as mortgage rates, credit card interest, and personal loans. A higher base rate usually raises these costs, potentially slowing consumer spending. This can help control inflation by reducing demand. On the other hand, a lower rate can stimulate borrowing and spending, spurring economic growth.
The BoE base rate also affects savings and investments. Higher rates encourage saving by providing better returns. On the flip side, lower rates may lead people to invest in assets like stocks or real estate to seek better returns. This can potentially boost asset prices.
BoE base rate also influences business borrowing. A lower rate would reduce the borrowing costs for businesses. This encourages investment in operations and expansion, which can stimulate employment and economic growth. Conversely, a higher rate can make borrowing costlier, discouraging investment and potentially slowing economic activity. Broadly speaking, the BoE base rate serves as a powerful tool for managing inflation.