The Bank of England base rate is the UK's most influential interest rate and its official borrowing rate. In light of the expected economic downturn due to the coronavirus (COVID-19), BoE has cut the base rate down further to 0.1%. 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.
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 base rate is currently 0.1%.
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.
This is usually reflected in the mortgage base rate - when the base rate is higher, interest rates on fixed rate mortgages tend to be higher. However in the current climate, although the base rate is at 0.1%, mortgage rates have remained relatively steady as banks are concerned about mortgage lending risks. As a result they have tightened their lending criteria and have withdrawn the higher LTV mortgage products.
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 (0.1%) plus 1%, making the total interest 1.1%.
When the base rate was higher, tracker mortgage rates acted in the opposite way and subtracted a percentage from it.
The global outbreak of coronavirus has forced the UK Government to take drastic steps to stem the economic impact by slashing the base rate for twice in March 2020.
During a special meeting of the Bank's Monetary Policy Committee on 19 March 2020, the Bank of England decided to cut the interest down further from 0.25% to 0.1%, warning that the pandemic will result in a "sharp and large" economic shock.
The Bank of England monetary policy committee last met on 17th September 2020 and had voted to maintain base rate at 0.1%.
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.
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.
The next Bank of England monetary policy committee (MPC) meeting is on 4 February 2021.
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.
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 stayed until 10 March 2020.
This table shows historical interest rates over the past 10 years*:
|Date of base rate change||New base rate (%)|
|19 Mar 20||0.10|
|11 Mar 20||0.25|
|02 Aug 18||0.75|
|02 Nov 17||0.50|
|04 Aug 16||0.25|
|05 Mar 09||0.50|
|05 Feb 09||1.00|
|08 Jan 09||1.50|
|04 Dec 08||2.00|
|06 Nov 08||3.00|
|08 Oct 08||4.50|
|10 Apr 08||5.00|
|07 Feb 08||5.25|
|06 Dec 07||5.50|
|05 Jul 07||5.75|
|10 May 07||5.50|
|11 Jan 07||5.25|
|09 Nov 06||5.00|
|03 Aug 06||4.75|
|04 Aug 05||4.50|
|05 Aug 04||4.75|
|10 Jun 04||4.50|
|06 May 04||4.25|
|05 Feb 04||4.00|
|06 Nov 03||3.75|
|10 Jul 03||3.50|
|06 Feb 03||3.75|
|08 Nov 01||4.00|
|04 Oct 01||4.50|
|18 Sep 01||4.75|
|02 Aug 01||5.00|
|10 May 01||5.25|
|05 Apr 01||5.50|
|08 Feb 01||5.75|
|10 Feb 00||6.00|
|13 Jan 00||5.75|
|04 Nov 99||5.50|
|08 Sep 99||5.25|
|10 Jun 99||5.00|
|08 Apr 99||5.25|
|04 Feb 99||5.50|
|07 Jan 99||6.00|
|10 Dec 98||6.25|
|05 Nov 98||6.75|
|08 Oct 98||7.25|
|04 Jun 98||7.50|
*Data from Bank of England