Inflation and interest rates FAQs

Bank Rate is the rate of interest we pay to commercial banks, building societies and financial institutions that hold money with us. It is also the rate we charge on loans we may make to them.

It is the core interest rate in the UK and it is our job to set it.

 

By raising or lowering Bank Rate.

When we raise it, banks will usually increase how much they charge their customers on loans and the interest they offer on savings. This tends to discourage businesses from taking out loans to fund investment and encourages people to save rather than spend. As a result, there is less demand for goods and people spend less.

The reverse happens when we reduce Bank Rate. Banks cut the rates they offer on loans and savings. That gives people freedom to spend more, which they tend to do.

But our actions affect other things. When we increase rates, it can affect a business's decision to take on more staff. So, we must also think about our impact on jobs.

To make sure prices do not rise or fall too quickly. 

The Government sets us a target of keeping inflation at 2%.

This is low enough to keep price rises small but high enough to avoid the problem of deflation.

If prices go up quickly or move around a lot, it is hard for businesses to set their prices and for people to plan their spending.

But falling prices, though this may sound appealing, can be bad for the economy. When overall prices fall, businesses make less money and cut costs by reducing wages and staff. This can lead to lower incomes and increased unemployment.

When it comes to an inflation target, there is no magic number. It needs to be low but the precise number is not as important as having a clear target. Like many countries, the UK has chosen 2%. We want prices to rise gradually and predictably, so people can make plans with more certainty.

Central banks usually change their rates by 0.25% but we can alter Bank Rate by as little or as much as we need to.

You can find out from our 'MPC Voting' spreadsheet. 

Our Monetary Policy Committee (MPC) decides whether or not we should change Bank Rate. When they meet, each member votes for what they think should happen. We record how they voted on this spreadsheet. Read more about how we decide what action to take. 

We do not have a profit-making objective. Our statutory objective is monetary (price) and financial stability. When Bank Rate increases, our own profits and losses from interest receipts and payments generally cancel each other out. We pay interest at Bank Rate on the reserve accounts banks hold with us – and most other accounts held here. This makes up our interest expense.

For more information see our annual reports and accounts.

Monetary policy is action that a country's central bank or government can take to affect how much money is in the economy and how much it costs to borrow. As the UK's central bank, we use two main monetary policy tools.

First, we set the interest rate we charge banks to borrow money from us – this is Bank Rate. See above for a detailed explanation.

Second, we buy government and corporate bonds – this is known as quantitative easing (QE).

We have used QE to stimulate the UK's economy since the 2008 financial crisis. 

We use monetary policy to affect how much prices rise or fall. We set monetary policy to achieve the Government's target of keeping inflation at 2%.

Low and stable inflation is good for the economy and it is our main monetary policy aim.

We also support the Government's other economic aims for growth and employment. Sometimes, in the short term, we need to balance our target of low inflation with supporting economic growth and jobs.

It decides what action the Bank will take to keep inflation low and stable. 

It has nine members. Five of them are already employees of the Bank (so we call them internal members). They are:

• our Governor
• our three Deputy Governors (for Monetary Policy, Financial Stability and Markets and Banking)
• our Chief Economist

Four of the members are people from outside the Bank, who have relevant knowledge or experience (external members). They work on the committee part-time, so they may have other commitments.

You can read about the members of the Monetary Policy Committee.

The Bank of England Act 1998 sets out the membership structure. It was designed to ensure the committee benefits from a wide range of skills and experience. 

Elizabeth II appointed our Governor and three Deputy Governors on the advice of the Prime Minister and the Chancellor.

The reigning monarch will make any future appointments.

The Governor appoints the Chief Economist after consultation with the Chancellor.

The Chancellor appoints the committee's four external members for a fixed term.

Eight times a year (about every six weeks).

It holds meetings, usually in the week or so leading up to the public announcement.

We publish the dates of the MPC's announcements in advance. 

Before they start their formal decision-making process, the MPC asks Bank staff to present the latest economic data and analysis. We call this the 'pre-MPC meeting'.

After that, the committee has three more meetings. The first usually takes place on Thursday before the public announcement. At this meeting, members look at what has happened since their previous announcement and talk about what that means for inflation and economic growth. 

The second meeting usually takes place on the next Monday. At this, the Governor invites each member to give their assessment of recent economic developments and to say what monetary policy action they think the Bank should take. Usually, the Deputy Governor for Monetary Policy speaks first and the Governor speaks last.

The final meeting usually happens two days later, on Wednesday. The Governor states what monetary policy action (including the level of Bank Rate) he thinks most committee members will support. Then all the members vote on it. The Governor asks anyone who disagrees with the majority view to state what alternative approach they would support. 

We publish the decision (with minutes of the meetings) at midday on Thursday.

This arrangement follows recommendations by the 2014 Warsh Review. It called for the Bank to make its decision-making more transparent. The structure is set out in the Bank of England and Financial Services Act 2016. You can read more about our transparency and accountability and how we formulate monetary policy.

Since 2015, we have recorded the committee's second and final meetings. We will publish transcripts of these after an eight-year delay.

Quantitative easing (QE) is when we create new money electronically and use it to buy gilts (government bonds) from private investors such as pension funds and insurance companies.

Usually, these investors do not want to hold on to this money because it yields a low return. So they tend to use it to buy other assets, such as corporate bonds and shares. That lowers long-term borrowing costs and encourages the issue of new equities and bonds. This should, in turn, stimulate spending.

When demand is too weak, QE can help to keep inflation on track to meet the 2% target.

QE is not about giving money to banks or companies. It’s about buying assets from them that we can re-sell. QE does not involve printing more banknotes.

We helped design QE to help businesses raise finance without needing to borrow from banks and to lower interest rates for all households and businesses.

We use quantitative easing (also known as asset purchase) to increase the amount of money that is available to businesses. We do this to support the economy and keep inflation low and stable. Our inflation target is 2%.

We use QE to boost spending in the economy as a whole and to improve the function of financial markets. We do this by buying high quality financial assets that we can sell again if we need to.

For example, we buy assets from insurance companies and pension funds that own and trade in high quality financial instruments like gilts (government backed bonds).

We introduced quantitative easing in March 2009 during the Global Financial Crisis. Our economy was grinding to a halt and there was a real risk of deflation (prices falling and goods being worth less tomorrow than they were today).

We bought gilts to inject money directly into the economy. Our aim was to increase spending and push inflation back up to the 2% target.

It is difficult to tell exactly how well it has worked. However, economies that introduced QE (such as the UK and the USA) appear to have fared better after the 2008 recession than those that did not.

Experience has shown us that if we buy assets from the public, it does not always lead to people spending more money.

In the past, people saved it rather than spent it because they were afraid there could be a recession or economic uncertainty. It is also unlikely that individuals own large quantities of gilts or other low-risk, high-quality bonds or shares.

When we buy assets under our quantitative easing (QE) programme, we receive something in return for the money we have created. Typically, these are government bonds (gilts).

 

If we just gave money to people without receiving anything in return, it would be difficult to reverse if we later needed to reduce the amount of money in the economy.

 

Our approach helps ensure that, when the Monetary Policy Committee (MPC) decides it can stop using QE to boost to the economy, it can. When that happens, we can withdraw the money we injected into the economy by beginning to sell the assets, such as gilts, that we bought.