Base Rate

This usually refers to the Interest rate set by the Bank of England. Interest rates decisions are taken by the Bank's Monetary Policy Committee. The MPC has to judge what interest rate is necessary to meet a target for overall inflation in the economy. The inflation target is set each year by the Chancellor of the Exchequer. One of the Bank of England's two core purposes is monetary stability. The base rate is used as a method of ensuring this by maintaining low inflation and consequently stable prices. This also has the knock on effect of providing confidence in the British currency and sustaining economic growth.

The Bank implements its interest rate decisions through its financial market operations. In practice this means that it is more-or-less the interest rate charged by the Bank of England when it lends money to banks. When you are charged interest by a bank, a bank will also have its own base rate, which it sets independently of the Bank of England base rate. If you have an overdraft, you’ll often be charged a margin over base rate, such as ‘7% over base rate’, so if base rate is 6%, you’ll be charged (7+6) =13%. Base rate fluctuations are especially relevant to people with mortgages as a sudden or sharp increase in the base rate can lead to a large increase in their repayments. Tracker mortgages are especially affected by any sudden changes in the base rate as they are set over an agreed time to operate at a certain level over the base rate.

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