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what is the Bank of England base rate and why is it important?

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If you keep up with the news, especially the business news, you can’t fail to notice the interest that surrounds the announcement of any Bank of England base rate change every month.

I knew that the rate used to be decided by the Chancellor of the Exchequer, but is now decided by a committee. I also knew that if the Bank of England rate changes, so do the rates for both borrowing and saving at high street banks and building societies (the ones that you and I are most likely to use). But, what exactly is it, and why does have the effects that it does?

The Bank of England interest rate is the rate at which the Bank lends money to high street banks.

In the normal run of things, high street banks can’t keep enough money on hand and they have to get some from elsewhere, so that they can lend money to customers and so on. Most of the money they need comes from people with deposits with them, but the system is such that they tend to run short on daily cash flow.

Since the Bank of England prints most of the currency, they essentially control the money supply, and eventually, someone will have to come and ask them to for money. This means that the Bank of England interest rate drives all the other English banks.

how it works, simplified

If you want to borrow some money from a high street bank, it will have to borrow some of that money from the Bank of England. If the interest rate it gets from them is, say 5%, then in order to make a profit, it needs to charge you a little more that, say 5.25%.

Savings accounts rates tend to be a little bit lower from the Bank of England interest rates, say 4.75% in this example, because there are costs involved in running savings accounts.

If you want to know more, you can look at the Bank of England website.

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11 comments for “what is the Bank of England base rate and why is it important?”

  1. Hey Plonkee,

    I suggest you write an article about how interest rates effect inflation and vice versa. Something practical for the masses.

    Posted by JohnofScribbleSheet | November 22, 2007, 12:07 pm
  2. Would you be interested in being a guest author on http://getprequalified.com? If you are interested please send me an email.

    Posted by dave mason | January 19, 2008, 4:51 am
  3. And you never thought to ask by keeping up with your news exactly how the Bank of England have this money to loan to an enitre country? Do you really think they create real wealth when they make a loan? Of course not its conjured out of thin air like all the national banks and because of this trick the whole world is in debt to the Banks and its hub the worldbank and the IMF. If we had a sound monatary system there wouldnt be a base rate because who could possibly have the monopoly on the money system to charge interest? A consequence of your precious base rate is the national debt which the governments of the world meaning you have to pay back to the banking system this now scales into the trillions of pounds and our income tax pays purely the interest on that debt alone, not your roads and hospitals.

    I could talk forever but people deserve what they get from their ignorance.

    Posted by Dan | May 8, 2008, 2:20 pm
  4. Are you sure that this definition is correct?

    Then why couldnt Northern Rock just borrow all the money it needed from the Bank of England when there was a run on it last year?

    There is something wrong with your definition, but I dont know what it is.

    Posted by Dave | November 6, 2008, 2:36 pm
  5. It did, that’s what prompted the run. There’s an extra layer of complexity in that banks normally borrow from each other and other financial institutions before they approach the Bank of England.

    Posted by plonkee | November 6, 2008, 5:52 pm
  6. Who is the appalling imbecile that wrote this nonsense? The Bank of England does not make loans to commercial banks at the basic interest rate. If it did, it would, of course, have no difficulty controlling the rates for commercial loans and mortgages. The commercial banks must, of course, borrow for most of their needs from the commercial money market, which exhibits rates unrelated to that of the so-called basic rate set by the Bank of England. Who do you think the rather pathetic Bank of England is, the U. S. Federal Reserve or the Bank of Canada? Until the bozo Bank of England actually engages in mass lending to the commercial banks at the so-called basic rate, their influence will be marginal! Why was the British public not aware of this? Are there no schools, no workhouses, no prisons? Humbug I say!

    Posted by Pat West | November 8, 2008, 10:44 pm
  7. The BoE base rate is the rate at which it enters into reverse repo agreements with eligable counterparties. And even in this instance they are the lender of last resort. The article above is rubbish.

    Posted by James | July 15, 2009, 11:05 am

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