What are interest rates?published at 10:01 British Summer Time
Michael Race
Business and economics reporter
Put simply, interest is the extra amount you get charged when you borrow money.
Say someone lends you £10 at a 10% interest rate, you’ll pay them back £11 – the £10 you borrowed, plus an extra £1 in interest (10% of £10).
The Bank of England’s base interest rate, which is being set today, dictates what rates most high street banks and lenders set for things – ranging from mortgages to credit cards and savings accounts.
When the Bank puts up its rate, it gets more expensive to borrow money, but it also means that returns on savings accounts, which accrue interest, go up.
When rates drop, as they are expected to today, borrowing becomes cheaper and saving rates typically go down.
The Bank of England’s job is to keep inflation, which is the rate prices rise at for goods and services, at an annual rate of 2%. It uses interest rates to try to keep it at that level.
When rates rise, people tend to spend less and save more. That slows the demand for goods and services, which can limit price rises and thus cool inflation.