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Understanding UK Interest Rates: An Overview of the UK’s Monetary Policy

Understanding UK Interest Rates: An Overview of the UK’s Monetary Policy

Date: 28 June 2023 | By: Marketing

Interest rates play a crucial role in shaping the economy of a country and here in the United Kingdom, it’s the Bank of England which is responsible for setting and adjusting interest rates; this is as part of its monetary policy.

In the business of mortgages, there is nothing more important than to understand interest rate rises and falls, and so here, we aim to give an overview of UK interest rates, their significance, and how they impact various aspects of the economy.

1. The Bank of England and Monetary Policy

The Bank of England (BoE) is the central bank of the United Kingdom and is responsible for maintaining price stability and promoting economic growth. One of the key tools at the BoE's disposal is the manipulation of interest rates. The Monetary Policy Committee (MPC) sets the interest rates in the UK, considering various economic factors such as inflation, employment, and GDP growth.

2. Base Rate and Its Significance

The base rate is the interest rate set by the BoE, and it then acts as a benchmark for other interest rates in the economy. Changes to the base rate have a ripple effect on borrowing costs for businesses and individuals, influencing spending, saving, and investing decisions. A higher base rate usually leads to increased borrowing costs, making it more expensive for businesses to invest and individuals to take out loans and mortgages. Conversely, a lower base rate can stimulate economic activity by encouraging borrowing and spending.

3. Inflation Targeting

The BoE's primary objective is to maintain price stability and keep inflation within a target range. Currently, the target inflation rate in the UK is 2%. If inflation exceeds this target, the BoE may increase interest rates to reduce spending and cool down the economy. Conversely, if inflation remains persistently below the target, the BoE may lower interest rates to stimulate economic activity and boost inflation.

4. Impact on Borrowers and Savers

Changes in interest rates have a direct impact on borrowers and savers. When interest rates rise, borrowers face higher costs for mortgages, loans, and credit cards. This can lead to reduced disposable income, lower consumer spending, and potentially slower economic growth. On the other hand, savers benefit from higher interest rates as they earn more on their savings accounts and fixed-term deposits.

5. Effect on Exchange Rates

Interest rates also influence exchange rates. Higher interest rates tend to attract foreign investors seeking higher returns, leading to an increased demand for our currency. This can cause the currency to increase in value. Conversely, lower interest rates may result in a decreased demand for the currency, leading to depreciation. Exchange rate fluctuations can impact international trade, import and export competitiveness, and inflation.


UK interest rates play a pivotal role in shaping the country's economy. The Bank of England's monetary policy decisions regarding interest rates are driven by various economic indicators, primarily focusing on price stability and inflation. Understanding the impact of interest rates on borrowing costs, savings, exchange rates, and overall economic activity is essential for individuals and businesses alike.  If you are a borrower, it is important that you understand the impact of future interest rate rises on the money you have borrowed.  In all instances, please take independent advice from a mortgage broker such as First Mortgage Solutions.


First Mortgage Solutions was established in 2016 and are specialist in mortgage and insurance protection.  We are independent and are 5-star rated on Google.