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Base Rate

When the Bank of England changes the official interest rate (base rate) it is attempting to influence the overall level of expenditure in the economy. When the amount of money spent grows more quickly than the volume of output produced, inflation is the result. In this way, changes in interest rates are used to control inflation.

The Bank of England set an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by mortgage lenders, commercial banks, and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.