Interest Rates: What is it, and how does it affect your personal finance and your country's economy?

When the Bank of England raised the interest rate recently, it became big news that splashed across the media world and hit the headline even in international media. But what is an interest rate and how does it impact your personal finance as well the economy of your country?

What is an Interest Rate?

Interest rate indicated the cost of borrowing. It means, in simpler terms, how much you must pay on the amount you have borrowed from your bank. It is generally a percentage of the loan amount. So, if you are a borrower, the higher the interest rate, the more you must pay.

Is Raising Interest Rate Good for You?

But it is just the opposite if you have put money in the bank. You get money for putting money in your bank and it is a part of the money you have deposited. So, the higher the interest rate, the more money you are paid.

Bank of England Raises Interest Rate

UK’s central bank, the Bank of England raised its base rate. What does it mean? It means the Bank of England, which is the central bank of England, will charge more money from the banks for taking money from the central bank. As commercial banks borrow money from the central bank at a higher rate, they too will increase the interest rate. Thus, the more the base rate, the more the interest rates a borrower must pay.

Interest Rate and Base Rate

Bank of England has a Monetary Policy Committee (MPC) that takes a collective decision and decides the base rate. When it raises the base rate, the interest rate goes up, borrowing from banks becomes costlier, and the inflation rate increases. The central bank then steps in and slashes the base rate to that the interest rate comes down and the economy cools down.

FAQs:

Q1. What is the base rate?
A1. The base rate is the interest rate charged by a central bank like the Bank of England from the commercial banks for the money given to the banks.

Q2. What is MPC?
A2. Bank of England has a Monetary Policy Committee (MPC) that takes a collective decision and decides the base rate. When it raises the base rate, the interest rate goes up, borrowing from banks becomes costlier, and the inflation rate increases.