The Bank of England Base Rate explained

by Leeds Building Society

On August 4th, the Bank of England cut the base rate from 0.5% to 0.25%. It was a huge, historic decision, and the story was covered in great detail.

But what is the Base Rate, why does it matter, and how does it affect us all?

What is the Bank of England Base Rate?

The Bank of England has reserves of money that it lends to commercial banks and building societies. The Base Rate is the interest rate at which they lend it. Since March 2009, they have lent the money at an interest rate of 0.5%, but now the rate has dropped to 0.25%.

When the Bank of England changes the Base Rate, banks and building societies tend to change the interest rates on their products, too.

Why does the Bank of England lower the base rate?

The Bank of England will lower the Base Rate to help support the economy.

By reducing the Base Rate, the intention is to encourage spending, which in turn supports the economy. Higher spending is encouraged by lower borrowing costs, lower interest rates on existing loans, and lower interest rates on savings accounts.

The Bank of England also changes the Base Rate to balance supply and demand. For example, if there is high demand for products, then it's common for those products to go up in value (or at least stay the same). If supply is higher than demand, the value of products usually goes down.

By reducing the Base Rate the hope is that individuals will have more to spend, which will increase demand for products, and in turn will help to support businesses. The Bank of England will try and use the Base Rate to keep the balance and the effect on inflation at a certain level.

Why do banks and building societies follow the base rate?

When the Bank of England cuts the base rate, it can strongly urge banks and building societies to adjust their rates too - so that the effect of the change is passed on to individuals and businesses.

That doesn't mean all interest rates should be exactly the same as the Base Rate. Banks and building societies are likely to also take into account customer and business needs when setting their borrowing and saving rates.

How will the base rate cut affect my savings/mortgage?

At Leeds Building Society, we're making a few changes to our interest rates as a result of the Base Rate cut. Read this article for details.

This guide is intended as a summary only and does not constitute financial or legal advice given by Leeds Building Society. No realiance should be placed on this guide. We recommend that you seek independent financial/legal advice if you have any questions or queries.