The Bank of England Base Rate is on the up, but what does that ACTUALLY mean?
With rates being super low for the last 10-years, we've had it easy and benefitted from cheap mortgage payments. However, rates seem to be on the up - it's important to know what the Bank of England 'Base Rate' is and how it affects you.
What is the Bank of England and what does it do:
The Bank of England is the central bank of the United Kingdom, was founded in 1694, and is one of the worlds oldest banks. It stands slap bang in the centre of the UK’s financial system and is committed to promoting and maintaining monetary and financial stability.
Since its foundation, it has been the Governments’ banker and, since the late 18th century, it has been banker to the banking system, more generally - the bankers’ bank.
As well as providing banking services to its customers, the Bank of England manages the UK’s foreign exchange and gold reserves.
The bank has two main purposes:
Monetary Stability - This means stable prices and confidence in the good old British Pound.
Financial Stability - This entails detecting and reducing threats to the financial system as a whole.
How does the Bank of England Base Rate affect you?
it’s in all our interests to have a healthy economy; one that’s steadily growing, where unemployment is low and our businesses are continuing to expand and invest in new technologies.
When this is happening the collection of taxes, such as income and corporation tax, is high which means there is less strain on the system being able to provide us with healthcare, through the NHS, and benefits to the unemployed or those unable to work through disability.
How does the Bank of England help achieve this?
Mainly through the use of it’s Monetary Policy - sounds fancy doesn’t it? But really what this means is that it is the Bank of Englands job to try and maintain stable prices for the stuff we buy.
Inflation (rising prices):
When we have plenty of money in our pockets during the good times and are out there spending it, prices go up and we all get less for our money. This is known as inflation, i.e. rising prices.
Deflation (falling prices):
The flip-side to the coin is that when things get tough and we tighten our belts and spend less, prices come down, i.e. falling prices = deflation.
A stable rate of inflation is important for economic growth and long-term stability. Historically the main way of controlling the rate of inflation is by influencing the price at which money is lent - the interest rate.
The target for the UK’s annual rate of inflation is 2% i.e. if we buy something today for £1 then that same item would cost £1.02 next year. If prices of the goods we buy start to increase due to short supply or a rise in demand the Bank of England raise the Interest Rate to effectively take money out of our pockets so we can afford less. The same happens in reverse and this is what we have seen over the last 5 years of recession and low/no growth.
As unemployment has risen and businesses are experiencing financial difficulties , people have less money to spend and confidence is low which has meant the Bank of England has lowered the rate to the record low of 0.25% (now 0.5%) to try and stimulate spending.
Most people with a mortgage have benefited from these low rates as their monthly re-payments have never been lower as the high street banks pass on these low rates. The downside to low interest rates is that savers currently get a very small return.
In short, we should all try to understand the role our central Bank plays in our economy as it has a direct effect on all of us, rich (i.e. Simon Cowell) or poor (i.e. the unemployed). If you would like to know more then go to: