On Thursday 2 February 2023, we raised our interest rate (Bank Rate) by 0.5 percentage points to 4%.
Our interest rate influences many other rates in the UK, including those you might have for a loan, mortgage or savings account. Bank Rate is also widely known as ‘the base rate’ or just ‘the interest rate’.
We are raising interest rates because inflation is too high. It’s around 10% now and our target is 2%.
Raising interest rates is the best way we have to bring down inflation.
It means many people will face higher borrowing costs. And some businesses will face higher loan rates.
We know that will make things harder for many people, coming on top of higher energy and food bills.
But we need to act to lower inflation. Low and stable inflation is vital so that money keeps its value and people can plan for the future with confidence. It’s fundamental for a healthy economy.
That’s why we have been raising interest rates over the last year.
Inflation has already edged down a little. We expect it to begin to fall quickly from the middle of this year and be around 4% by the end of the year. We expect it to continue to fall towards our 2% target after that.
How Bank Rate has changed over time
How high will interest rates go?
The future is uncertain, so we can’t be precise about what will happen to Bank Rate in future. That will depend on what happens in the economy and what we think will happen to the rate of inflation over the next few years.
We will continue to review how the economy is doing and whether a change in interest rates is needed every six weeks or so. If it looks like higher inflation is going to be more persistent than we thought, then we may need to increase interest rates further to make sure it comes back down.
We will make our next interest rate decision on Thursday 23 March 2023.
How will interest rate rises affect me?
If you have a loan or mortgage that charges you a variable interest rate, you might find that the cost of your repayments goes up.
If you’re on a fixed rate, you won’t see any change until the end of your fixed period.
It’s important to understand how a change in interest rates could impact your ability to pay. You can use a mortgage calculatorOpens in a new window to work out how your monthly payments might be affected.
If you have savings in a bank account that pays interest, you might see interest rates on your savings go up.
Why isn’t my mortgage, loan or saving interest rate the same as the Bank of England’s rate?
When we raise our interest rate, banks will usually raise the interest rates for both savers and borrowers. But, to cover their costs, banks normally pay less to savers than they charge to borrowers. So there’s usually a gap between rates on savings and loans.
How do higher interest rates help to bring down inflation?
Higher interest rates make it more expensive for people to borrow money and encourage people to save. Overall, that means people will tend to spend less.
If people spend less on goods and services overall, the prices of those things tend to rise more slowly. Slower price rises mean a lower rate of inflation.
The action we take to keep inflation low and stable is called monetary policy.
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(Bank of England)