The Bank moves rates up and down to try to control inflation, which measures the pace of overall price rises.
By raising rates, borrowing is made more expensive, so people have less money to spend. People may also be encouraged to save more.
In turn, this reduces demand for goods and slows the rate at which prices are rising.
But it is a balancing act – increasing borrowing costs risks harming the economy as it discourages businesses from investing and creating more jobs.
Once price rises are more under control, then the Bank will consider lowering interest rates.
Its base interest rate heavily influences the rates High Street banks and other money lenders charge customers for loans, credit cards and other finance deals.
This is most obviously seen in the cost of mortgages. Reducing the base rate would see an immediate impact for those on “tracker” mortgages.
About 629,000 mortgage-holders have tracker deals. Typically, their monthly repayment would fall by about £29 as a result of the expected 0.25 percentage point cut later.
A similar number of householders have variable rate deals, and lenders will be under pressure to cut their rates if the Bank reduces the base rate.
Fixed rate deals do not change immediately, but the expectation of further rate cuts could lead to new, or renewing, borrowers getting a better deal.
Savers would be hit by a base rate fall, as the return they receive from banks would also be likely to be cut.
Source:
www.bbc.com
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