Why do interest rates change?

In this article we cover:

What makes the base rate rise or fall?

What happens when the base rate changes

How often does the base rate change?

Why do interest rates matter to you?

How changing interest rates affect your mortgage

What are negative interest rates?

This guide will help you understand how the base rate works, why it changes, and what those changes mean for your personal finances.

The Bank of England reviews the base rate against its inflation target of 2%. 

At times, it may encourage people and businesses to save. At other times, it may want them to borrow and spend.

Inflation is the rate at which the prices of goods and services increase.

Inflation can rise and fall because of supply and demand-related factors. For example, a company may increase the price of their goods if their production costs go up.

The target of 2% aims to allow prices to increase at roughly the same rate as wages. This should encourage some economic growth and keep the cost of living affordable.

To find the latest information on inflation visit the Bank of England website.

If the Bank of England feels inflation is rising too quickly, it may raise the base rate. 

When the base rate goes up, interest rates may rise. 

It then costs more to borrow money, but it also means you can earn more on your savings. Due to this, people may be encouraged to borrow less and save more. This reduces demand for certain goods and services, which could slow inflation down.

If the Bank of England feels the rate of inflation is too low, it may cut the base rate. 

When the base rate goes down, interest rates may fall. 

It costs less to borrow money but also means that you earn less on your savings. Due to this, people may be encouraged to borrow and spend money rather than save it. This increases demand for certain goods and services, which could lead to a rise in inflation.

The base rate is generally reviewed 8 times a year. It doesn’t change every time, and it can stay the same for years.

Interest rates can affect:

A lower base rate is good news for borrowers, as the rate of interest you get charged may be lower. This means you could have more money left over each month to pay off debt, save, or spend. 

When it’s cheaper to borrow money, it can be a good time to get a mortgage or a car loan, for example. Businesses may also look to borrow funds to expand or employ more staff.

Bear in mind – if you borrow money when interest rates are low, you need to make sure you can afford the repayments now and, in the future, in case interest rates go up.

When interest rates are high, people and businesses may not be able to afford to borrow and spend in the same way as when interest rates are low.

A higher base rate is good news for savers – as you may be able to earn more interest on your savings. This can encourage people to save more than when interest rates are low. 

How much changing interest rates will affect your savings depends on the type of savings account you have and how much you've saved.

As interest rates rise and fall, so can mortgage rates. How this affects you depends on 3 factors:

If you have a fixed-rate mortgage, the interest is fixed for a set period. If interest rates change during this period, it won’t affect your fixed rate or monthly payments. 

However, if you don’t switch or remortgage when your fixed rate ends, you could be moved onto your lender’s Standard Variable Rate. 

If you’re on a variable rate mortgage, like a tracker mortgage, a change in the base rate is likely to affect your monthly payments.

Explore: What is a tracker mortgage?

Keep in mind – mortgage rates are based on several factors, not just changes to the base rate.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Some countries, such as Switzerland, Denmark and Japan, have previously had negative interest rates, where they fell below 0%.

Central banks, such as the Bank of England, may use negative interest rates to try boost the economy by encouraging people to borrow and spend money – and save less. For example, if you had a variable savings account, negative interest rates could mean you’d earn no interest.

Some banks allow you to fix the interest rate you earn on your savings for a certain amount of time. If you have an account with a fixed rate, you won’t be affected by changing interest rates. However, you may not be able to access your savings during the fixed-rate term.  

Explore: Fixed rate vs variable rate savings accounts

This article was last updated: 24/06/2026, 08:24