Jennifer Clarke BBC News 20 December 2019
Updated June 20, 2024
Image credit: Getty Images
At its June meeting, the Bank of England decided to keep interest rates on hold at 5.25% for the seventh time, keeping it at its highest level in 16 years.
The pause comes after a period of 14 consecutive rate hikes as the bank sought to tame inflation.
What is the Bank of England?
The Bank of England is the UK's central bank. It is independent of the Government but works closely with the Treasury.
Why does the Bank of England change interest rates?
It is the first time in almost three years that inflation has reached the Bank of England's target.
The recent surge in inflation was driven primarily by rising energy and food prices and was largely due to global events such as the war in Ukraine, but other factors, such as rising wages in the UK, are also keeping prices high.
The Bank of England's traditional response to rising inflation is to raise the UK's official interest rate.
This will affect the savings and mortgage rates charged by the big banks and building societies to individuals and businesses.
The bank raised interest rates for the 14th consecutive time since November 2021, bringing them to 5.25%, the highest level since February 2008.
Headline inflation has fallen to the bank's target, but other inflation measures are still higher than the bank would like.
How do changes in interest rates affect inflation?
For example, when interest rates rise, people have to pay more for their mortgages, meaning they have less money to spend on other things.
If fewer people want to buy things, prices should theoretically rise more slowly.
It also makes it more difficult for companies to borrow money to expand their operations.
Conversely, if banks cut interest rates, borrowing costs will fall and people will have more money to spend on other things.
This could encourage businesses and people to borrow and spend more, stimulating the economy.
Bank of England Governor Andrew Bailey said he had seen “strong evidence” that the process of containing inflation was “well underway”.
But he stressed that once the bank reaches its 2% target, it must be confident it will stay there.
The first rate cut could come at the bank's next meeting on Aug. 1, according to minutes from the bank's June meeting.
How does the Bank of England change interest rates?
The bank's Monetary Policy Committee (MPC) meets eight times a year to set interest rates.
The nine-member committee votes on whether to raise, lower or keep interest rates constant.
Minutes of the meeting where the decision was made are also made public. The minutes show how each member voted, which may provide clues about future decisions.
The bank also publishes a Monetary Policy Report four times a year, which contains economic analysis and inflation forecasts that the Monetary Policy Committee uses in making interest rate decisions.
The next report is due to be published alongside a decision in August.
What else will the Bank of England do?
Bonds are like IOUs from the government, which uses them to raise funds to meet spending obligations.
Between the 2009 financial crisis and 2021, the Bank bought £875 billion of government bonds through a process known as quantitative easing, which was intended to reduce the government's overall borrowing costs, lower interest rates and stimulate spending in the economy.
The bank said it would follow through on plans first announced in August 2022 to sell some of its holdings of government bonds after its intervention ends.
What are the bank's other responsibilities?
It issues banknotes, oversees credit and debit card payments, regulates banks and building societies, monitors risks in the UK financial system and takes measures to mitigate them, including lending to banks if necessary. It shares this responsibility with the Treasury and the financial regulator, the Financial Conduct Authority. It also holds the UK's gold reserves (400,000 gold bars worth over £200 billion) as well as the gold reserves of other central banks.
Who runs the Bank of England?
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He was chief teller from January 2004 to April 2011 and his signature appears on billions of British banknotes.
The Governor is not only responsible for the supervision of the bank, but also chairs three important committees – the Monetary Policy Committee, the Monetary Policy Committee and the Prudential Regulation Authority – that work to ensure the bank achieves its objectives.