Inflation and interest rates FAQs

We use our Bank Rate to influence the interest rates that banks and building societies offer their customers. 

We can do this because Bank Rate is the interest we pay to banks, building societies and financial institutions who hold reserve accounts with us.  

So when we raise Bank Rate, banks will usually increase how much they charge on loans and the interest they offer on savings. This tends to discourage businesses from taking out loans to finance investment and to encourage people to save rather than spend. As a result, there is less demand for goods and people spend less.  

The opposite happens when we reduce Bank Rate. Banks cut the rates they offer on loans and savings. That usually results in people spending more.  

But our actions also 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 what impact our decisions will have on jobs. 

Bank Rate is the interest rate we pay to commercial banks that hold money with us (this includes all major banks in the UK).

By changing Bank Rate, we can influence how much interest these banks charge (or pay) their customers.

The main reason we change Bank Rate is to make sure the cost of things you buy (eg food, electricity and transport) doesn’t rise (or fall) too quickly. 

As a central bank, we can use our Bank Rate to influence other UK interest rates. How high (or low) interest rates are, affects how much prices rise over time (inflation). 

The government has set us a target of keeping inflation at 2%. Find out more about inflation or about our Bank Rate and the 2% target.

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. 

Central banks usually change their bank rates by 0.25% but we can change Bank Rate by as little or as much as we need to. For example, we have more recently changed Bank Rate by 0.5% and 0.75% due to the expectation of higher inflation, and the US Fed changed rates by 0.75% too.

The Bank of England works to keep price rises low and stable. If prices go up quickly or move around a lot, it’s hard for businesses to set their prices and for people to plan their spending.

The Government has set the Bank of England a target of keeping inflation at 2%. Having a target lower than that would carry a risk of overall prices (as measured by the Consumer Price Index) falling. Falling prices may sound appealing, but it could lead to deflation and that is bad for the UK’s economy.

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 that people know we are working towards. Like many other countries, the UK has chosen 2% as that target. Our aim is for prices to rise in a gradual and predicable way, so people can plan for the future with more certainty. 

We don’t have a profit making objective. Our statutory objective is monetary (prices) and financial stability. When the 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 held at the Bank of England by banks and most other accounts held here. This forms 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 influence 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.

Second, we can create money digitally to buy government and corporate bonds – this is known as asset purchase or quantitative easing (QE).

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

We use monetary policy to influence how much prices rise (‘the rate of inflation’) or fall (‘the rate of deflation’). We set monetary policy to achieve the Government’s target of keeping inflation at 2%

Low and stable inflation is good for the UK’s 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.

The Monetary Policy Committee (MPC) decides what monetary policy action the Bank of England will take to keep inflation low and stable. 

The committee has nine members. Five of them are already employees of the Bank of England (so we call them ‘internal’ members). They are:

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

Four of the members are people from outside the Bank of England who have relevant knowledge or experience (we call them ‘external’ members). The external members work on the committee part-time so they may have other complementary commitments.

See the current members of the committee.

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

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

Future appointments will be made by the monarch, King Charles III.

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

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

The committee set Bank Rate and other monetary policy eight times a year (about every 6 weeks). They hold a series of meetings, usually in the week or so that leads up to their public announcement.

We publish the dates of their announcements in advance. 

Before they start their formal decision-making process, the Monetary Policy Committee (MPC) ask Bank of England staff to present them with the latest economic data and analysis. We call this the ‘pre-MPC meeting’.

After that, the committee has three more meetings. The first meeting usually takes place on Thursday before the public announcement. At this meeting, committee 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 following 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 of England should take. Usually, the Deputy Governor responsible 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 their decision (with minutes of their meetings) at 12pm on Thursday.

This arrangement follows recommendations by the 2014 Warsh Review. It called for the Bank of England 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.