In the UK, the interest rate is the amount charged, expressed as a percentage of the principal, by a lender to a borrower for the use of money.
The interest rate is the percentage of an annual loan charge that is added to the original sum of the loan. For example, if you take out a loan of £100 at an interest rate of 10%, you would need to repay £110 at the end of the year. The interest rate is usually determined by the lender, although in some cases it may be set by law.
In the UK, the Bank of England sets an ‘official’ interest rate (also known as the ‘base rate’) that other banks and building societies use as a guide when setting their own rates. This official rate is used in financial markets and affects the cost of borrowing for businesses and consumers. However, each bank or building society can choose to set its own rates depending on its own business needs.
Bank Interest Rate
The bank interest rate is usually set by the Bank of England’s Monetary Policy Committee (MPC) and reviewed on a monthly basis. It influences other rates such as mortgage rates and business lending rates. The MPC uses monetary policy (setting the interest rate) in order to meet the Government’s inflation target.
If inflation is above target, then the MPC will look to raise interest rates in order to slow down spending and bring inflation back down to target. If inflation is below target, then the MPC will look to reduce interest rates in order to encourage spending and bring inflation back up to target.
The below chart shows how the interest rates have changed over time.
