How Does the Bank of England Influence Bank Rates?

Whether they’re savers or borrowers, all British consumers are directly affected by the interest rates set by the Bank of England.  Also known as the base rate, many commercial banks, and other financial institutions set their own rate for lenders according to the rate stipulated by the Bank’s Monetary Policy Committee (MPC) (including the Student Loan Company).    

Meeting eight times a year, the MPC is responsible for meeting the government’s inflation targets, and the interest rate is crucial for this monetary policy.  If it’s set too high, consumers reduce their spending, and businesses and retailers can close down resulting in job losses. Too high and people borrow more which can lead to increased indebtedness and rising inflation.  The British government’s target is for inflation to be around the 2% mark.

In August 2018, the Bank of England base rate rose for only the second time in a decade so it now stands at 0.75%.  This is the highest it has been since the UK started its long recovery from the global crisis of 2008. This has had an effect on borrowers, notably those who have loans with a variable rate.  For example, the 3.5 million Britons who have a variable or tracker mortgage (with an average interest rate of 4.72%). Anyone with a £150,000 tracker mortgage has seen their annual payments go up by £224 since the August rise of 0.25% in the base rate.

People who take out short-term loans aren’t so affected by rises in the base rate since they borrow money at a fixed rate.  Payday loans direct lender for bad credit UK clearly advertises their rate.  As they are FCA authorized, they are limited by a price cap about how much they can charge their borrowers.

Although savers are also theoretically affected by increases in the Bank of England interest rate, mainstream financial institutions are notoriously much slower about passing on these increases to people with savings accounts.  After the first increase, only half of banks and building societies actually raised their interest rate for savers, and this only happened months after the rise came into effect.

In view of the increasing political and economic uncertainty regarding Brexit, some groups (such as the British Chamber of Commerce) were critical of the rise in the Bank of England base rate.  These critics believe that the rise was ill-timed and risked reducing business and consumer confidence at a time when it really needed to be boosted.

Mark Carney, the Governor of the Bank of England, tried to reassure these people by saying that the Bank had a number of different scenarios prepared in anticipation of Brexit.  He also pointed out that when it came to monetary policy, the most crucial factor was how consumers would react, and this was unpredictable.

What is inevitable is that there is going to be one, or even two, further rises of 0.25% in the Bank of England interest rate before 2020.  However, they would be imposed gradually.

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