Introduction to Interest Rates

Interest RatesInterest rates are the cost of borrowing

money.The Bank of England sets the Base Rate,

which is a guide to other lenders. Banks and building societies change the interest rates they charge generally in line with changes in the Base Rate.

The main reason for the Bank of England changing the Base Rate is to control inflation, but it also considers the state of the economy – what is happening to unemployment and growth.

Past Changes in the Base Rate.The chart shows how the Base Rate has changed over the past 25 years. At it’s highest it reached 15%, but over the last 10 years it has not been above 6%.In 2009 the base rate was reduced to 0.5%, and has remained at this lowest ever level.

Impact of increased interest ratespeople spend more on paying mortgages,

so less money left over for spendingpeople are less likely to borrow as the

cost of loans has increased, so less spending

firms borrow less for investment all this means less demand in the

economy, so inflation should fall, but firms can go bust, and workers lose their jobs.

Impact of falling interest ratespeople spend less on paying mortgages,

so more money left over for spendingpeople are more likely to borrow as the

cost of loans has fallen, so there is more spending

firms borrow more for investment all of the above means that demand

increases in the economy, and jobs are created.