Interest Rates Explained

One of the biggest factors that effect the amount of money you could be making from your savings is the interest rate and rate of inflation. Interest rates are set by the Bank of England and affect not only your savings accounts but also the amount you would pay back if you were to take a loan out. If you are saving money, you want interest rates to be higher whereas those who are borrowing money want these interest rates to be low.



The actual interest rates you would be charged for lending or you would earn on savings changes depending on the individual providers and can be analysed using savings calculators and the providers websites but the Bank of England set what is called the "base rate". The idea behind low interest rates like what we are seeing at the moment is that it will encourage people to take out loans which in turn will encourage people to spend more, stimulating the economy because businesses are making money. You can see from savings calculators how much you would be earning on your savings which is an indirect indication of how much you could be paying on a loan.



The problem with low interest rates however is that as people spend more money, it can drive prices up because of the increased demand. The increased prices results in an increase in inflation, which is a measurement of how the prices rise over a certain period of time on average. For example, a rate of inflation of 4% would mean that on average the cost of essentials has gone up 4%. That’s not to say that everything is 4% more expensive because the inflation analysts focus on prices such as petrol and bread more than they do other things. So if petrol prices have shot up 10% it may give a slightly unfair example of how much prices have increased. When inflation is high, which is generally a bad thing for the country and the economy, the Bank of England will likely raise the interest rate to encourage less spending and more saving. The knock on effect being that spending and as a result inflation begins to fall once again.



So you can see how closely inflation and interest rates are linked but to be able to see how these current rates are affecting you, you can visit the Office of National Statistics or Bank of England websites or more relevantly, use a savings calculator to tailor it to your personal circumstances.