The Bank of England base rate influences all loan and mortgage interest rates in the UK. When the Bank of England decreases the base rate, interest rates usually decrease as well. This means borrowing gets cheaper - but returns on savings will go down as well.
The current Bank of England base rate is 5.25%.
The base rate has been rocketing over the past year or so. It dropped to an all time low of 0.1% in March 2020 to try and help the economy survive impact of coronavirus, and stayed there until November 2021.
Then the rises began. By March the base rate was 0.75%, by September it was 2.25% and by the end of the year rates were 3.5% - the highest they'd been for more than a decade.
Then the Bank's rate-setting Monetary Policy Committee (MPC) didn't meet in January, but raised rates by another 0.5 points in February to leave them at 4%. This was then followed by 0.25 percentage point increase in March, and another in May taking it to 4.5%. There was a further 0.5 percentage point increase in June taking the base rate to 5%, and recently a 0.25 percentage point increase to the current base rate today of 5.25%.
The base rate, sometimes known as the bank rate or base interest rate, is the most important interest rate in the UK. It is used by the Bank of England primarily to control inflation, by doing that it tries to stop prices of everyday things - food, fuel, clothing - from rising too quickly.
The goal is to keep inflation as close to 2% as possible - so the bank will act if price rises are too low as well as too high.
Set by the Bank of England (BoE), the base rate influences the interest rates offered by other banks and building societies. If the base rate goes up, then most mortgage, loan, and savings rates will generally go up too - and vice versa.
By changing the UK's base rate, the Bank of England can influence how Brits use their money - whether we're more inclined to spend money or save it.
Generally, if the BoE reduces the base rate, it becomes cheaper to get a mortgage or loan, and you're more likely to buy a house or car.
At the same time, by making savings less rewarding, it’s trying to encourage people to spend their cash and help the economy (and prices) grow.
If the base rate goes up, mortgage repayments and loan repayments become more expensive - to discourage spending - but on the positive side, you'll also earn more interest on your savings.
If you have a fixed rate mortgage, changes to the base rate won't impact your monthly repayments until the fixed rate period ends. When your initial term ends, though, you should consider remortgaging to another fixed rate mortgage deal.
The current base rate is 5.25%. While that's higher than it has been since the 2008 financial crisis, it's not considered exceptional historically, keeping mortgage interest rates in the UK down.
Over history, the base rate has tended to move between 2% and 7% - with two notable exceptions.
During the 1970s, for example, base rate rose to an astonishing 17%, while in the period after the credit crunch rates fell to all time lows of initially 0.5% and then - as Coronavirus struck - 0.1%.
When the base rate changes, interest rates change and the amount of money that people spend overall is meant to follow suit. The Bank of England uses the base rate to influence how much people spend and as a consequence, keep inflation rates in line with the Government target of 2%.
The BoE can change the base rate at Monetary Policy Committee (MPC) meetings, which generally happen eight times a year. The next one is on Thursday 14 December.
It's difficult to predict exactly when the Bank of England will change the current interest rate, though they do try to control expectations by issuing guidance on whether the base rate will go up or down over the next year.
The Bank can also call emergency meetings if needed - as was seen after in the financial crisis of 2008.
The BoE uses the base rate to keep inflation at around 2%, so if Brits start spending too much or too little, an interest rate change is usually around the corner.
Because the financial sector and the rest of the country is so heavily impacted by base rate changes, it's rare for a base rate change to be a surprise move, but it can happen as an emergency measure to tackle unexpected economic conditions.
When the BoE base rate increases, it becomes more expensive to borrow money. This means that interest rates on loans and mortgages are higher, costing you more each month to borrow.
Conversely, when the bank base rate decreases it becomes cheaper to borrow, which can result in cheaper mortgage rates and more money available from lenders for consumer borrowers.
Although it has not happened, the Bank of England did highlight that the base rate could fall into a negative interest rate. The result of a negative base rate would be that no interest would be due on borrowed money.
However, as has happened in the past when rates have gone negative in other countries, it’s highly unlikely banks would offer 0% deals to customers on mortgages or loans - or take money from savings accounts. It would mean rates would likely drop though.
The BoE has been setting the base rate in the UK since way back in 1694.
Following the global financial crisis in 2008, the BoE gradually cut the base rate from 5.5% down to just 0.25% in August 2016 - at the time the lowest interest rate the UK had ever seen until that point in time.
Before the Covid-19 pandemic, the Bank of England base rate had been slowly climbing, to 0.5% in November 2017 and then 0.75% in August 2018. It then fell to an all-time low of 0.1% during the crisis, only to start to rise again in late 2021 as inflation rose.
In the past, the base rate was set by the Chancellor of the Exchequer - that led to years with multiple changes even inside a month. In 1984, for example, the base rate changed 14 times, starting at 8.8%, rising to 12%, and then falling back to 9.5%.
Gordon Brown set up the current system - where a Monetary Policy Committee chaired by the governor of the Bank of England, has the power to set rates based on an inflation target set by the government rather than the Treasury directly.
Traditionally they met every month, but rates could still change four or more times a year. More recently that has reduced to eight planned meetings a year.
Historically mortgage rates have usually followed the base rate, with the average mortgage rate generally around 2% higher than the bank base rate.
This graph shows how the base rate rose and fell from 2008 to October 2023:*
Salman is our personal finance editor with over 10 years’ experience as a journalist. He has previously written for Finder and regularly provides his expert view on financial and consumer spending issues for local and national press.