What is the Bank of England and why does it change interest rates?

16 minutes

The Bank of England has put up interest rates to 5.25% as it tries to control inflation.

Bank of England

The Bank of England has put up interest rates to 5.25% as it tries to control inflation, which has remained higher than expected.

The Bank's main interest rate has now increased 14 times since November 2021.

The Bank of England is the UK's central bank. It is independent of government but works closely with the Treasury.

It describes its key job as ensuring the UK has secure banknotes, stable prices, a safe banking sector and a resilient financial system .

The Bank has a target to keep inflation - the official measure of how quickly prices are rising - at 2%.

The headline CPI inflation rate dropped from a high of 11.1% in October 2022 to 7.9%, in June, but that is still almost four times the target.

"Core" inflation - which excludes the price of energy, food, alcohol and tobacco - was 6.4% in June, down from 6.5% in May - its highest rate for over 30 years.

The recent sharp increases in inflation were initially due to rising energy and food costs - largely caused by global events such as the war in Ukraine - but other factors, things like wage increases in the UK, have also helped keep prices high.

The Bank's traditional response to rising inflation is to increase the UK's official interest rate.

This influences the saving and borrowing rates charged by High Street banks to individuals and businesses.

In August, the Bank put up interest rates for the 14th time in a row , increasing them to 5.25%, their highest level since April 2008.

Higher interest rates means people have to pay more for their mortgages , for example, which means they have less money to spend on other things.

Fewer people wanting to buy things should, in theory, mean that prices rise less quickly.

It also makes it harder for firms to borrow money and expand.

Alternatively, if the Bank cuts interest rates, borrowing becomes cheaper, and people have more money to spend on other things.

This can encourage businesses and people to borrow and spend more, boosting the economy.

Interest rates are now expected to rise less sharply than had been predicted , after the fall in inflation in June.

The Bank's Monetary Policy Committee (MPC) meets eight times a year to set rates.

Its nine members vote on whether to increase, reduce or hold interest rates.

Minutes of the meeting at which the decision was taken are also published.

Four times a year, the Bank also publishes a Monetary Policy Report , which sets out the economic analysis and inflation projections that the MPC uses to make its interest rate decisions.

The Bank of England also buys and sells government bonds .

Bonds are a bit like an "I owe you" from the government, which uses them to raise money to help meet its spending commitments.

In the period from the 2009 financial crisis until 2021, the Bank of England bought £875bn of government bonds. This was done through a process called quantitative easing , which was designed to reduce overall government borrowing costs, lower interest rates and stimulate spending in the economy.

The Bank also announced an emergency bond-buying programme to try to stabilise the economy after September 2022's mini-budget caused turmoil on financial markets.

Once that intervention ended, the Bank said it would go ahead with a plan - first announced in August 2022 - to sell off some of the government bonds it holds.

The Bank also:

Andrew Bailey took over as governor in 2019, having already worked at the Bank for more than 30 years.

He was the Bank's chief cashier from January 2004 until April 2011, which meant his signature appeared on billions of UK banknotes.

As well as being responsible for overseeing the Bank, the governor also chairs three important committees that help it work towards its targets: the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority.

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