Bank of England base rate: Why does it matter to you?

Posted on

When it changes, the Bank of England base rate is something that’s featured heavily in the news. But why is it important and when does it matter to you?

The base rate is the interest rate that the Bank of England sets, in turn, it affects the interest rates that banks, building societies and other financial services offer. The base rate changes depending on economic conditions and influences the way consumers behave:

  • Low interest rates mean that borrowing is more affordable, encouraging consumers to spend more. When interest rates are low we’re more likely to consider buying a car using finance or take out a larger mortgage
  • In contrast, high interest rates mean you’ll earn more on savings and pay more when borrowing. As a result, it encourages people to save rather than spend

The Bank of England’s monetary policy committee sets the base rate, with members voting to leave base rates as they are or change them.

How has the base rate changed over time?

In recent times, we’ve become used to low-interest rates but this hasn’t always been the case.

The current Bank of England base rate is 0.75%. It’s been low for over a decade, following the 2008 financial crisis. In April 2008 the base rate was 5%. However, this was slashed several times over the course of a year in an effort to improve the economy and encourage consumers to spend and support businesses. In August 2016, it was cut even further, to 0.25%, taking it to a historic low. Over the last two years, it has increased but at a very slow pace.

Whilst we’ve experienced low interest rates for over a decade, this isn’t the historic norm.

During the late 80s, the base rate was far higher. In fact, the interest rate reached 15% in 1989. There are many factors that led to this decision but one of the key reasons was that it was seen as a way to reduce inflation.

The current interest rate and that of the late 80s are extremes. Looking at the historical average, interest rates have usually fallen between 4% and 6%.

But how will the Bank of England base rate change in the future? It’s impossible to say with certainty, but economic turbulence caused by ongoing Brexit uncertainty could mean that interest rates will fall even further; good news for borrowers but bad news for savers.

At the last monetary policy committee meeting in November, the base rate was held. However, it was the first time since June 2018 that this wasn’t a unanimous decision. It could signal that the base rate will be cut further if the UK leaves the EU in bid to support the economy.

The impact on your finances

The base rate set by the Bank of England affects the interest rate commercial banks will lend money. It’s used as a benchmark when lending to businesses and individuals.

Saving

You’ve no doubt noticed that savings have been benefitting from poorer interest rates over the last decade. If, since the financial crisis, you’ve been a saver rather than a borrower, you’re probably worse off.

For much of the last decade cash savings are likely to have grown by only small amounts. In fact, once you factor in inflation, your savings have probably declined in real terms. This means the spending power of your savings has been reduced.

In the past, cash savings may have offered you a way to grow your wealth safely over the long term. But lower interest rates may now mean it’s more appropriate to invest in order to outpace inflation.

Borrowing

In contrast, borrowers have benefitted from the low interest environment. It’s cheaper than ever before to borrow money. The interest rates for credit cards, loans and other forms of borrowing are competitive.

One of the areas you may have noticed this in is your mortgage. Our mortgage is often the largest loan we’ll ever take out and interest payments can be significant. If you had a tracker mortgage, which tracks the Bank of England base rate, at the time of the financial crisis, you’ll have noticed minimum payments fell.

Lower interest rates make borrowing more affordable. They also present the opportunity to overpay and reduce debt quicker, whilst paying less interest.

The Bank of England base rate may affect the best way to use your money. At some points, it’s wise to quickly pay off debt but in others, it can be more prudent to save or invest your capital. If you’d like to discuss how to get the most out of your wealth in the current low interest environment, please contact us.

We aim to keep our clients up to date on interesting and relevant financial news.

You can sign-up to receive our monthly newsletter by email, even if you’re not yet a client. Sign-up using the form below.

Client testimonials

I have always found Black Swan to be caring and understanding of my quirky lifestyle. I always feel they try to get me the best returns while respecting my current needs.

Sally Muir

A client since 2011

We would be very happy to recommend the support and service we receive.

Valerie Locks

A client since 2010

I have always been completely useless regarding finance - thankfully our financial adviser is not! I've retired with far more than I ever expected and investments continue to grow safely. So - thank you!

Bernadette Jane Warner

A client since 2000

Very happy with the professional service I have received and feel a lot happier now with my finances put in order.

Martin Field

A client since 2011

Julie Cooper was recommended to me by a work colleague. She has been very helpful, professional and has explained everything well. I would definitely recommend her services to anyone else who are interested in a financial review.

Steven Rooke

A client since 2018

…Service has been first class.

Hugh Fells

A client since 2012

My face to face meetings with Rob Young and Jessica Lyons have always been very open and understandable. My questions have been answered clearly and I have left feeling that my financial matters are in good hands.

Sandra Jack

A client since 2000

[A] safe pair of hands in a complex financial world.

Gary Middlehurst

A client since 2003

A reliable company with good communication skills and good knowledge of the financial markets.

Alan Evetts

A client since 2014

Maureen Pembridge is a long-time trusted advisor to our family. The market might fluctuate but her attention to detail is consistent.

Linda Burnard

A client since 2000

I am pleased to recommend Julie as a trustworthy financial advisor. She explains financial jargon in plain language, and always listens carefully to my particular financial needs and has helped me make the best of my savings.

Carolann Samuels

A client since 2010

I have always been satisfied with the way that Black Swan has handled my account. And I have always found the staff very helpful whenever I need to call the office.

Robert Anthony Matthews

A client since 2012

An excellent personal service from a person I know and trust.

Michael Dalton

A client since 2010

I am getting a very good services from Black Swan, they have got my investments sorted out which was in a bit of a mess.

Roy Jakens

A client since 2012

A good, efficient team providing clear ideas to shape a winning strategy.

Adrian Michael Levenstein

A client since 2011

Black Swan is a company to be trusted, with friendly staff and professional advisors.

David Brian Jennings

A client since 2017

I have been with Black Swan for many years. I have never wished to change anything. They give a good straight forward service.

Martin Barrett Brooks

A client since 2010

Andy Peters has been invaluable in firstly combining several pension pots and then giving excellent investment advice. It has given us a great deal of comfort to know that our financial affairs are in such good hands.

James Guillum Scott

A client since 2014

I find my financial advisor easy to talk to and feel that she understands my lifestyle. She is always available for help when I need her and explains in words that I can understand.

Margaret Ena Glasgow

A client since 2000

Andy is a first rate Director, excellent communicator and leader.

Ross Perry

A client since

Black Swan Financial Planning and Andrew in particular, are very clever at working out how risk averse we are, and coming up with solutions that we feel comfortable with. We are happy in the knowledge that we can continue to enjoy a comfortable retirement. Andrew Peters is a very, very friendly person who is great to chat to and easy to deal with. He explains things very clearly in layman’s terms, and if we still don’t understand, he explains it until we do!

Alan & Jane Dyer

Clients since 2012

We have always found Rob [Young] to be very approachable and knowledgeable. We have every confidence in the advice given and feel comfortable with the decisions we’ve made. There are certain opportunities that we wouldn’t have known about if Rob hadn’t brought them to light, which makes the advice good value for money as far as we’re concerned.

Peter & Pauline O’Halloran

Clients since 2013

Rob [Young] is extremely knowledgeable. I knew nothing about the different types of trusts which will not only secure my income in retirement, but also leave a legacy for my children. I’m glad that I sought his advice when I did.

Sarah Wilson

A client since 2015

I am extremely happy with the service afforded to me by the company and my adviser Julie Cooper.

Geoff Coxell

A client since 2010

My wife and myself have been dealing with Black Swan for a number of years. We have met with different representatives from the company over the years and have found all very helpful in their own way. We met with James [Anderson] a few years ago and found him very helpful and knowledgeable. He keeps in contact with us on a regular basis. We find the Company information very helpful and we feel very secure with our finances.

Andrew Kirchen

A client since 2015

I have always found my adviser to be easy to contact, very professional in his approach, yet friendly and understanding. I have a sense of an experienced company behind him, really on the ball financially and with good standards.

B McBean

A client since 2011

Partner with the most reliable and experienced team of advisers

Enter your details & we'll be in touch to discuss your needs.
Alternatively, contact us directly and speak to a member of the team.

    Subscribe to our newsletter