Bank of England base rate

The Bank of England base rate is the UK's most influential interest rate and its official borrowing rate. It is currently 0.75% - a historically low figure. The base rate impacts all other interest rates. When the rate is low, it costs you less to borrow money, but means you earn less on your savings.

What is the Bank of England base rate?

The Bank of England (BoE) base rate is often called the interest rate or Bank Rate (like us!). It sets the level of interest all other banks charge borrowers.

The Bank of England explains the interest as: "What you pay for borrowing money, and what banks pay you for saving money with them." Its purpose is to help regulate inflation.

The government sets the Bank of England an inflation target to keep it in check. The Monetary Policy Committee (MPC) then decides on the interest rate.

Over the past couple of years, the base interest rate has crept up from 0.25% (its lowest ever point) to 0.75%.

This has been reflected in the mortgage base rate. In 2016, you could get a two-year fixed-rate mortgage with a 65% LTV from HSBC with an interest rate of 0.99%. The lowest rate you could now get for the same product is around 1.4%. It is not a huge leap, but it hints at an upward trend.

Higher interest rates on mortgages cost you more over the full mortgage term. This is why more borrowers are opting for five and even ten-year fixes.

Of all the variable mortgages, tracker mortgages follow the UK base rate most closely.

The current base rate in the UK is low, so most tracker mortgages add a percentage on top. For example: the interest rate might be the BoE interest rate (0.75%) plus 1%, making the total interest 1.75%.

When the base rate was higher, tracker mortgage rates acted in the opposite way and subtracted a percentage from it.

What is the current base rate?

The Bank of England monetary policy meeting met on August 1 and decided to keep the base rate at 0.75%. The next base rate decision will be on 19 September, 2019.

UK interest rates

UK interest rates centre around the Bank of England base rate.

In 2007, the Bank of England interest rate was around 5.5%. The average variable mortgage rate was 7.5%.

In December 2008, the MPC dropped the base rate to 2%. The MPC dropped it again to 0.5% in 2009 where it remained for around seven years. At this point, the average variable mortgage rate was around 2.5%.

In August 2016, Bank of England rate was at its lowest ever point: 0.25%. Getting a long fixed-rate mortgage at that time could have saved you thousands in interest.

Current interest rates have remained relatively stable over recent years. They are low, but there is speculation they will rise again.

A low Bank of England rate encourages people to borrow money because it's less expensive for them to repay. The less you spend repaying debts, the more money you can spend elsewhere. More spending makes for a more buoyant economy.

With the current base rate sticking at 0.75%, mortgage rates have also stayed consistent. Competition in the mortgage market helps this.

When does the base rate change?

The MPC meets roughly every six weeks to decide the base rate. It does not change the base rate each time. As the above graph shows, it can stay the same for years.

The last interest rate rise was in August 2018. It went from 0.5% to 0.75%. In terms of historical interest rates, this is very low.

Inflation is one of the main reasons why the bank rate fluctuates at all. Inflation is determined by the state of the economy. The aftermath of the global financial crisis in 2008 was low inflation and even lower interest rates.

These low rates allowed people who lost their jobs, for instance, to still spend money on the essentials. Rates have stayed small to help the economy get back on its feet.

So, the next Bank of England meeting does not mean an interest rate rise. However, the economy is changing and a Bank of England rate rise could reflect that.

Will Brexit impact the UK interest rate?

The Bank of England says that it's closely watching the British economy to see how it responds to Brexit.

When or if Brexit occurs, it will likely have a very large impact on the UK economy. If we crash out of the European Union without a deal, the BoE could cut interest rates to stimulate the economy.

If we leave the EU with a good deal, then the base rate could stay the same - or increase slightly to counteract inflation.

With so many unanswered questions and variables, it is very hard to predict whether Brexit will impact interest rates or not.

Bank of England base rate history

Over the course of the BoE base rate history, rates have fluctuated.

A base rate increase in October 1981 saw rates at their highest ever point: 15%. Rates decreased for a few years before rising to around that point again in 1991. Since then, the base rate has gradually decreased to single figures.

The biggest and most sudden drop was at the end of 2008, when the Bank of England reduced rates by 4% over 5 months.

In August 2016, base rate history was made when the MPC cut the bank rate to 0.25%. It stayed at 0.25% for over a year. At the end of 2017, there was an interest rate increase to 0.5%.

On 2 August 2018, there was another rate rise to 0.75%, where it has stayed ever since.

This table shows historical interest rates over the past 10 years*:

*Data from Bank of England

As the economy continues to improve, a Bank of England interest rate decision to increase it could be around the corner.