Bank Rate
Who sets it, how a change reaches the economy and how to talk about a decision
3 min read
Bank Rate is the Bank of England's main interest rate: the rate it pays commercial banks on the money they hold with it. Because banks can always earn that rate at the Bank of England, it anchors what they charge borrowers and pay savers across the economy.
Who sets it and why
Bank Rate is set by the Monetary Policy Committee (MPC), which has nine members: the Governor, three Deputy Governors, the Chief Economist and four external members appointed by the Chancellor. It normally announces a decision eight times a year, and each member votes, so the split of votes is published too.
The government sets the target and the Bank decides how to hit it. The target is 2% inflation, measured by the Consumer Prices Index (CPI). If inflation moves more than 1 percentage point away from 2% in either direction, the Governor has to explain why in an open letter to the Chancellor.
How a change reaches the economy
- Borrowing: tracker and variable-rate mortgages and loans change quickly, while fixed rates change as deals come up for renewal
- Saving: higher rates make saving more rewarding, so households may spend less
- Businesses: dearer borrowing can delay investment and hiring, especially for companies with a lot of debt
- Asset prices: higher rates tend to weigh on bond prices, share prices and house prices
- Sterling: higher UK rates relative to other countries tend to support the pound, which makes imports cheaper
These effects take time. The Bank of England has said a change in Bank Rate can take up to about two years to have its full effect on inflation, which is why the MPC sets policy based on where it expects inflation to be, not just where it is today.
Winners and losers
| Who | When Bank Rate rises |
|---|---|
| Savers | Earn more on cash, once banks pass the rise on |
| Borrowers on variable rates | Pay more interest straight away |
| Banks | Can earn a wider margin on deposits, but may see more borrowers struggle to repay |
| Housebuilders and estate agents | Tend to see weaker demand as mortgages cost more |
| Fast-growing companies | Their future profits are worth less today, so their valuations often fall |
| The government | Tends to pay more to borrow when it sells new gilts |
Expectations matter as much as decisions
Markets try to price decisions before they happen. If everyone expects a cut, the cut itself may barely move gilt yields or sterling. What moves markets is a surprise: an unexpected decision, a different vote split or a change in what the MPC signals about the future. That is why analysts read the Monetary Policy Summary and the minutes closely, not just the headline decision.
Bank Rate isn't the Bank of England's only tool. Through quantitative easing it has bought large amounts of gilts to push longer-term borrowing costs down, and through quantitative tightening it can shrink those holdings again by selling gilts or letting them mature.
How to talk about it
Say what the MPC decided, why (the balance between inflation and growth) and what it means for the division: lenders' margins, the cost of financing a deal or activity on a rates desk. Mention the vote split if it was close, because it hints at what comes next. For the mechanics, read Rates, FX and gilts.