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Why do interest rates change?

Interest rates may rise and fall as the Bank of England makes changes to its base rate.

The base rate is the UK’s official borrowing rate for banks and building societies and influences the interest rates they offer to customers. 

Interest rates affect your money, whether you’re a borrower, a saver or running a business.

What makes the base rate rise or fall?

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 explained

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

For example, inflation was 6.7% in August 2023. This means prices are 6.7% higher on average than they were a year ago – a £10 box of washing powder 12 months ago would now cost £10.67.

Inflation can rise and fall because of supply and demand. For example, the inflation rate fell during the first coronavirus lockdown as petrol became cheaper because there was less need for fuel. 

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

When the base rate rises

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 – so people may be encouraged to borrow less and save more. This reduces demand for certain goods and services, which could slow inflation down.

When the base rate falls

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 means you earn less on your savings – so 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.

Why do interest rates matter?

Interest rates can affect:

  • the way people spend money
  • how much it costs to borrow money
  • how much people save

It could be cheaper to borrow when interest rates are low

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 debtsave 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 so they can 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.

Earn more on your savings when interest rates are high

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.

How can changing interest rates affect your mortgage?

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

  • type of mortgage you have
  • amount you’ve borrowed
  • length of your mortgage term

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

If you don’t switch or remortgage when your fixed rate ends, however, you may be moved onto your lender’s standard variable rate. 

If you’re on a variable rate mortgage, or have a tracker mortgage, a change in the base rate – and interest rates – is likely to affect your monthly payments.

Keep in mind – mortgage rates are based on a number of factors, not just interest rates.

You can use our mortgage calculator to work out how your monthly payments might be affected.

How often does the base rate change?

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

During the coronavirus pandemic, the base rate reached a record low of 0.1%. From December 2021 it started to rise and in August 2023 it reached 5.25%, its highest level since 2008.

What are negative interest rates?

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

Central banks, such as the Bank of England, may use negative interest rates to try to boost the economy by encouraging people to borrow and spend money – and save less. For example, if you had savings in a variable 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 a fixed rate savings account, 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: Types of savings accounts