Bank of England base rate

Welcome, everyone. This lecture will guide you through the essential concept of the Bank of England’s base rate. The base rate is the interest rate set by the Bank of England for lending to commercial banks. This pivotal rate influences nearly all other interest rates throughout the UK economy, from savings accounts to mortgages. The base rate acts as a benchmark, steering the cost of borrowing and the returns on savings and investments. Understanding how this rate works is key to making sense of how monetary policy is conducted and how decisions made at the Bank of England impact the broader economic landscape across the country. The base rate is the main tool the Bank of England uses to control monetary policy. By raising or lowering this rate, the Bank aims to manage objectives such as stable inflation, high employment, and steady growth. When inflation exceeds the target, increasing the base rate makes borrowing more expensive and encourages saving, helping to slow price rises. Lowering the base rate makes borrowing cheaper, stimulating spending and investment when the economy slows. The effectiveness of these measures depends on how changes in the base rate influence the rates banks offer. A crucial aspect of the base rate’s influence is the transmission mechanism—the process by which changes in the base rate affect the wider economy. When the base rate is adjusted, banks respond by altering the interest rates they charge borrowers and pay to savers. Ideally, this shifts