What is the base rate and how does it affect me?

The base rate — in the UK, Bank Rate, set by the Bank of England's Monetary Policy Committee — is the interest rate the central bank pays on reserves held by commercial banks. It is the anchor from which most other rates in the economy are derived.

Why it exists. The Bank has an inflation target, currently 2%. The base rate is its principal tool. Raising it makes borrowing more expensive and saving more attractive, dampening spending and investment, which slows demand and — with a lag — inflation. Cutting it does the reverse to stimulate a weak economy.

How it reaches you:

Tracker mortgages move directly with it, usually base plus a margin, changing within a month or two.

Standard variable rate mortgages move at the lender's discretion, typically following increases promptly and cuts less so.

Fixed-rate mortgages do not change during the fixed period — but the rates available on new fixes are priced off expectations of future base rate, embodied in swap rates. This is why fixed rates can move before the Bank acts, in anticipation.

Savings rates generally follow, though banks pass increases on slowly and incompletely, and cuts quickly. The gap is a source of profit and of periodic political criticism.

Credit cards, overdrafts and personal loans are influenced but are dominated by risk pricing, so a small base rate change barely moves a 30% credit card rate.

Business lending and the wider economy, affecting employment and investment.

Two things worth understanding:

Transmission is slow. Changes take an estimated 18 months to two years to have their full effect, which is why the Bank acts on forecasts rather than current data — and why decisions often look badly timed in retrospect.

The exchange rate responds too, as rate differentials attract or repel capital, affecting import prices.

Markets price in expectations, so anticipated changes move rates before announcement.