What is the Bank of England’s base rate?

What is the Bank of England’s base rate?

The Bank of England’s base rate, sometimes called the Bank of England rate or simply the base rate, is the rate the Bank of England charges other lenders to borrow money. It’s used by other banks and building societies to set their own interest rates on loans such as mortgages, as well as savings accounts.

Keep an eye on the current Bank of England base rate with our Tracker.

How does the base rate affect interest rates?

When the base rate goes up, this makes borrowing more expensive for lenders, so they often raise their own interest rates in response. This is good news if you’ve got cash in the bank, as you’ll earn more interest on your savings. But it can be bad news if you want to borrow money, as it makes taking out loans for things like mortgages, cars or personal finance more expensive. On the other hand, when the base rate falls, so does the cost of borrowing, so interest rates often tend to follow suit.

See what's happening with live rates and compare mortgage deals with our Mortgage Rate Comparison tool.

What is the history of the Bank of England’s base rate?

The history of the Bank of England’s base rate goes back further than you might think. The base rate was created when the Bank of England was granted a Royal Charter by King William and Queen Mary in 1694. This charter originally stated that the bank was founded to “promote the public Good and Benefit of our People”, which at the time meant funding wars with France.

Over the centuries, the base rate has been used to cool or stimulate the economy or control inflation, in particular during uncertain times such as during wars, financial crises or pandemics.

If you look at how the base rate has changed since it was first introduced, you can see that there were some periods when the base rate stayed stable, and others when it was constantly in flux. 

For example, the highest base rate level ever recorded was in 1979 when it peaked at 17%. The lowest ever recorded level was in 2020 when it fell to 0.1% during the Coronavirus pandemic. Typically, a much more normal range for the base rate is between 4-6%.

Back in my day…

You can see from the graph that the 70s and 80s were periods of great turbulence, when interest rates soared in an attempt to control inflation after oil prices and wage rises caused it to increase drastically. When talking to your parents or grandparents about the difficulties of getting on the ladder today with rising interest rates, they might mention this time as a period when their mortgage payments increased dramatically - which they did.

However, it’s important to put the increases into context. The average cost of a house in the UK at the end of the 70s was £19,925. If you bought a house then when interest rates were at their highest at 17%, your monthly repayments would be £259, roughly 26% of the average earnings of two people*. 

Today, the average house in the UK costs £291,000. With current interest rates around 5%, your monthly repayments would be £1,687 - 32% of the average salary of two people*. So while paying 17% on a mortgage back then certainly wasn’t easy, it was much more affordable than current interest rate levels. If interest rates rose to 17% today, mortgage repayments would cost £3,766, 71% of the average salary for a two-earner household!

Based on a 25 year mortgage term and 10% deposit. Average wage in late 1970s was £6,000 (£500 per month), average salary in 2023 is £31,772 (£2,648 per month). Salaries are pre-tax. 

What is the current Bank of England base rate?

The current Bank of England base rate is 5.25% — its highest level since 2008. The Bank of England raised its base rate 14 times in a row, the most recent rise being 0.25% on the 3rd August 2023. At the most recent meeting on the 21st March 2024, they voted 8-1 to hold the base rate at 5.25% for the fifth time in a row.

Back in March 2020, the Bank of England cut the base rate twice. They hoped that by reducing the cost of borrowing, they’d ease the economic pressure caused by the Coronavirus pandemic. The first cut was on the 11th March, bringing the rate down from 0.75% to 0.25%. Just eight days later on the 19th March it dropped again to 0.10%.  

Is the base rate going up?

The base rate is not going up - at the moment it's stayed at 5.25% since August 2023 and is expected to be cut several times over the second half of 2024. It’s increased more than a dozen times over the last few years, gradually rising from 0.10% in December 2021 to 5.25% today. For context, in 2021 when the base rate rose it was the first increase in 14 years - since then it rose 8 times in 2022 and 5 times in 2023. Now, experts are forecasting the base rate to gradually decrease to 4% by the end of 2024, and 3% by the end of 2025.

Why is the base rate going up?

By increasing the base rate, the Bank of England hoped it could get inflation under control which is currently above the 2% target. By increasing the base rate, the Bank of England is trying to stop people borrowing and spending so much, while rewarding saving. If people spend less money, this will (in theory) stop companies from increasing their prices as quickly, which should bring down inflation. While there’s no guarantee this will work, towards the end of 2023 inflation was gradually declining. The most recent figures show inflation stands at 3.9%, the lowest level in more than two and a half years, and is expected to fall below 2% in April.

This was a larger-than-forecasted decline, fueled by slowing food and eating out prices. But housing and fuel prices continue to rise, squeezing household budgets.

Keep reading: Tembo's mortgage rate and house price predictions for 2024

What’s going to happen to my mortgage costs?

If you’ve got a fixed-rate mortgage, you’re protected from interest rate rises until the end of your fixed term. If your fixed-rate is set to end in the next six months, it may be wise to speak to a mortgage broker sooner rather than later. If you’re on a variable rate deal, every time the base rate rises you will likely see an immediate impact to your monthly repayments.

Learn more: What should I do when my fixed-rate mortgage ends?

How high will the base rate go?

No one knows for sure how high the base rate will go, but experts believe it has now peaked at its current level of 5.25%. As long as inflation keeps coming down, the Bank should start lowering the base rate in 2024.

While some have criticised the Bank of England’s tactics, the Chancellor Jeremy Hunt has made it clear that the government supports the Bank of England in “doing whatever it takes” to get price increases under control. 

When is the next Bank of England base rate meeting?

The Bank of England’s next base rate meeting will be held on the 9th May 2024 They usually meet every six weeks, but during times of crisis they tend to meet more often.

How often does the Bank of England base rate change?

There is no hard and fast rule for how often the Bank of England’s base rate changes. The base rate will only be increased when the central bank feels it’s necessary to do so. Some years, the base rate stays stable and barely changes, other times, like more recently, the base rates is changed each time the Bank of England meets.

Tembo’s predictions for the Bank of England base rate: