Q

What is the base rate?

A

It's the U.K.’s official interest rate.

The base rate is a term that you probably don’t hear a lot, but one that affects your finances in pretty profound ways. The Bank of England base rate is the U.K.’s official interest rate, and it’s also commonly referred to as the official bank rate. It’s a number set behind closed doors by a group of nine (ideally very wise) people called the Monetary Policy Committee, which meets eight times a year and uses the base rate as the primary means of regulating the economy.

In practice, the number represents the government-mandated interest rate that the central bank will charge as a so-called lender of last resort in order to prevent bank runs (it’s considered a “last resort,” since in most circumstances, banks will lend each other money to maintain their reserves.) Generally, when the economy is struggling, the Bank of England will lower the base rate in order to free up money that will be used for lower interest loans to businesses and individuals, spurring economic growth.

If the economy is performing so well that there’s too much money flowing through it, there’s a danger that inflation will infect the system, meaning that a pound wouldn’t buy as much as it could buy a year ago. In order to prevent this, the Bank of England will raise the base rate, closing the spigot of money coursing through the economy.

So will a base rate change affect little old you? Quite likely. Any rise and fall will eventually reach your doorstep in the form of increased or lowered interest rates on products like home mortgages and business loans.

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What are interest rates?

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