06-01-2022
This is a look at the UK interest rate history. The bank of England base rate history goes back to 1694 when it was initially set at 6%.
The rate of interest the central banks charge is a tool used to combat inflation and reduce consumer spending. The rate of interest charged by central banks affects many things including, inflation, savings rates and mortgage rates.
The bank of England base rate has historically been set by the Chancellor of the Exchequer. In 1984 the base rate changed 14 times.
Who sets interest rates in the United Kingdom?
Nowadays, the bank base rate is set by a monetary policy committee (MPC) headed up by the Governor of the Bank of England. The MPC meet at a set 8 times per year.
Bank of England interest rate chart: 1995-2021
What is the highest the Bank of England base rate has ever been?
The highest the bank of England base rate has ever been was in November 1979 when it was 17%. It remained at the same rate until July 1980.
What is the lowest the Bank of England base rate has ever been?
The lowest the bank of England base rate has even been was in March 2020 when it was 0.1%. It stayed at this level until December 2021 when it was raised to 0.25%.
What was the Bank of England base rate in 1694?
The initial rate was set at 6%. In 1716 the rate dropped to 4%, and then rose again in 1719 to 5%, where it remained for over 100 years.
How often do the MPC meet?
The MPC meet 8 times a year. The MPC will meet on a Thursday (often this is set as the 1st Thursday of the month) in which they plan to meet but sometimes falls on the 2nd or 3rd Thursday of the month.
The MPC meet for a period of 3 days and discuss monetary policy, look at the economy and data and then decide whether to change the Bank of England base rate.
Why does the Bank of England increase interest rates?
The bank of England increases interest rates to combat inflation. The Treasury sets an inflation target of 2% and interest rates are a tool which can be used to help achieve this target.
A brief history of interest rates, inflation and macroeconomics
Further down in this article is a graph which details interest rates since 1975. It’s useful to look at why interest rates were at those levels at that time. We can correlate worldwide events with sharp changes to the Bank of England base rate.
Baby boomers
Everything seems to originate from the World Wars, and we can now show how demographics, politics and fiscal policy, consumption and debt affects interest rates.
In 1900 the British empire was booming but, like all empires, they are hard to maintain. Germany was rising all the time. Then came one of the greatest unintended consequences of all time – the shooting of archduke Franz Ferdinand.
WWI took place, with consequences that the world had never seen before. There were tanks, planes, 20 million deaths. When the war ended with Treaty of Versai, the US, Germany, France and Britain came up with a war repatriation payment for Germany which, today, equates to around half a trillion dollars.
Germany couldn’t pay their debt, so they debased their currency. Germany collapsed and out of this rose Hitler. WWII happens and 70 million-die.
Post WWII and the world started to get on with life again. Humans are euphoric and created the largest population boom the world has ever seen. This was important as these demographics kickstarted a butterfly effect.
Global population grew by 30% in 20 years. Technology and manufacturing used in the war fed into everyday use, including cars, washing machines and other household items. The added fiscal stimulus ensured that the 1950s were a boom period.
The global powers created a system that would prevent another World War from ever happening, and the US became the main global superpower. The baby boomers entered the workforce in the late 60s and early 70s, meaning a huge amount of people were now working, buying goods and driving cars etc, so inflation rose to its highest level ever (in 1975 it was at 24.2% in the UK).
Interest rates rose to combat inflation, and in 1979, the Bank of England base rate hit an all-time high of 17%.
Right to buy
Margaret Thatcher was in power and had an idea to turn council houses into private ownership. Selling the houses at low prices won the conservatives lots of votes, but it was effectively turning people into debtors and reducing their surplus income (post mortgage repayments).
Both Thatcher in the UK and Regan in the US started to turn the population from creditors into debtors via mortgages. This is important to note as it really kickstarted the mortgage market.
Property prices increased as people could access debt more easily, and so demand for property also increased. Wages were not increasing at the same rate, so people started to borrow money in order to “live the dream” of a house, car, family, holidays etc.
In 1987, Black Monday/Tuesday/Wednesday saw stock markets drop by around 25%, with many attributing this to over indebtedness.
Bank of England interest rate chart: 1975-2021
UK housing market crash of 1990
In the early 90s, the baby boomers were in debt. They were facing the globalisation of labour markets and a technology boom which would eventually replace manual jobs. Asset prices increased and, consequently, so did debt leverage.
Houses prices and repossessions in the 1990s
Average house prices fell from around £52,000 in 1989, to £50,000 in 1994. This was blamed on high interest rates making owning a home unaffordable, resulting in approximately 345,000 repossessions between 1990 and 1995.
Interest rates dropped from 13% in the early 90s, to around 6% in 1996.
The big short
As made famous by the film the Big Short, the next major incident (and one from which we have still not recovered), was the mortgage debt crisis of 2008. Mortgage lenders offered 100% mortgage debt, with some lenders offering 100% secured debt and an additional unsecured loan on top.
People were able to self-certify their income with no physical checks of bank statements, payslips, or accounts, with the mortgage debt being sold on as securities to become “someone else’s problem”. Eventually this all unravelled, and in 2008, banks faced financial ruin and the housing market collapsed.
The Bank of England started to print more money to boost the economy and called it “quantitative easing”. At the same time, interest rates fell to an all-time low of 0.5% (2009).
Money printers go brrr
In the years that followed, quantitative easing continued and in 2022, banks are still using quantitative easing.
When the coronavirus pandemic became a global crisis in 2020, interest rates fell again – this time to all-time lows of 0.1% (March 2020). The UK government issued more debt (a lot of which is not repayable), in the form of grants and furlough income.
Where do interest rates go next?
The Bank of England base rate increased to 0.25% in December 2021 to tackle increasing inflation. The issue is that inflation is increasing due to supply issues, and it is not all due to overspending.
Global banks have played their ace card by printing money and reducing rates, but everyone from governments and banks to the everyday person on the street are now in debt. Any increases in debt will hit pockets hard.
How the world deals with the economic situation now is up for debate. Options include raising taxes, cutting interest rates or fiscal stimulus. The options left open to central banks are reducing and we will likely see the US and UK raise interest rates in 2022. Inflation is rising rapidly and the banks need to bring that under control, but is it the right move?
Let us see what the next chapter brings.
Updated February 2022 – The Bank of England base rate has now increased by 0.25% and is now 0.5%. Inflation expectations are as high as 7% for the year, hence the need to increase interest rates. We expect the base rate to be increased again to 0.75% later this year. Some banks and economists are predicting base rate will be at 1.25% this year.
Mortgage advice
Fox Davidson are UK mortgage brokers and the advice we give to clients on whether to fix, take a base rate tracker or a variable rate set by the mortgage lender, is case specific.
Mortgage lenders in the UK offer fixed rates for up to 10 years, giving clients certainty of their mortgage costs and protecting them against rising interest rates.
Fox Davidson provide insightful advice to clients wishing to secure a mortgage. To discuss your mortgage requirements please do call us on 01179 89 79 50 or email enquiry@foxdavidson.co.uk
