Introduction

This article is for anyone interested in UK economic history, finance professionals, and homeowners. Understanding the history of the Bank of England base rate helps explain current economic conditions and mortgage rates. This article explores the Bank of England base rate history and its impact on the UK economy. The Bank of England has been setting the base rate in the UK since 1694. The Bank of England’s base rate influences the interest rates set by commercial banks. The Bank of England changes its interest rate to help influence the UK economy.

As of January 2026, the Bank of England’s base rate stands at 3.75%, after a gradual downward trend from a peak of 5.25% in 2023.

Understanding the base rate history is crucial for anyone looking to make sense of the current economic landscape, mortgage rates, and the broader financial environment in the UK.

Table of Contents

• Who sets interest rates in the United Kingdom?
• Key Periods in Bank of England Base Rate History
• Bank of England interest rate chart: 1995-2021
• What is the highest the Bank of England base rate has ever been?
• What is the lowest the Bank of England base rate has ever been?
• What was the Bank of England base rate in 1694?
• How often do the MPC meet?
• Why does the Bank of England increase interest rates?
• A brief history of interest rates, inflation and macroeconomics
  • Post-WWII Economic Boom
  • 1970s Inflation and Rate Hikes
  • 1980s Mortgage Market Changes
  • 1990s Housing Market Crash
  • 2008 Global Financial Crisis
  • COVID-19 Pandemic and Recent Rate Changes
• Mortgage advice

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 is responsible for the interest rate set by the Bank of England, which influences borrowing costs for banks and mortgage interest rates for consumers.

How the MPC sets the base rate:

• The MPC meets 8 times per year.
• Meetings are typically scheduled for Thursdays (often the 1st Thursday of the month, but sometimes the 2nd or 3rd).
• Each meeting lasts for 3 days.
• During these meetings, the MPC discusses monetary policy, reviews economic data, and decides whether a base rate change is needed.

Gordon Brown played a key role in granting the MPC independence to set interest rates, transferring this power from the Treasury to ensure decisions are made without political interference.

Understanding who sets the rates helps explain how and why they have changed over time.

Key Periods in Bank of England Base Rate History

Historically, interest rates have remained relatively steady since the Bank of England was founded in 1694, but certain periods in base rate history stand out:

• 1694: The initial base rate was set at 6%.
• 1716-1719: The rate fell to 4% in 1716, then rose to 5% in 1719, remaining there for over 100 years.
• 1979: The base rate reached its highest ever level at 17%.
• 2009: The base rate dropped to 0.5% in response to the global financial crisis.
• 2020: The rate hit a historic low of 0.1% during the COVID-19 pandemic.
• 2023: The base rate peaked at 5.25% before beginning a gradual decline.
• 2026: As of January, the base rate stands at 3.75%.

These key periods reflect how the Bank of England has responded to major economic events and changing conditions.

Bank of England interest rate chart: 1995-2021

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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 ever been was a historic low of 0.1% in March 2020, marking the lowest level in the Bank’s history. 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 saw a fall to 4%, followed by a rise in 1719 to 5%, where it remained for over 100 years.

How often do the MPC meet?

The MPC meets 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.

Meeting process:

• The MPC meets for a period of 3 days.
• They discuss monetary policy, look at the economy and data, and then decide whether a base rate change is needed at each meeting.

Understanding the MPC’s meeting schedule and process provides insight into how rate decisions are made and how frequently they can change.

Why does the Bank of England increase interest rates?

The Bank of England increases interest rates to combat inflation. Increasing interest rates helps to control rising prices by discouraging spending and encouraging saving. The Treasury sets an inflation target of 2% and interest rates are a tool which can be used to help achieve this target. Bank of England aims to keep inflation at 2% by adjusting the base rate.

Knowing why the Bank of England changes rates helps us understand the broader economic context and the impact on everyday finances.

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. Major events in the UK economy, as well as periods like the global financial crisis, have significantly influenced the Bank of England base rate.

Post-WWII Economic Boom

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.

After WWII, the world started to get on with life again. Humans were 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.

1970s Inflation and Rate Hikes

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).

Rising inflation during this period significantly increased the cost of living, making everyday expenses and household payments more challenging for many families.

Interest rates rose to combat inflation, and in 1979, the Bank of England base rate hit an all-time high of 17%.

1980s Mortgage Market Changes

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 Reagan 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.

• Increased borrowing and the availability of loans meant that households owed a higher total amount, as more people were borrowing money to buy homes and take on other forms of debt.
• In 1987, Black Monday/Tuesday/Wednesday saw stock markets drop by around 25%, with many attributing this to over indebtedness.

1990s Housing Market Crash

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.

During this period, commercial banks offered a range of mortgage deals, including fixed-rate and remortgage deals, which contributed to the rise in household 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. This decrease provided some relief to homeowners through lower interest rates, helping to reduce mortgage repayments and ease financial pressure.

2008 Global Financial Crisis

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, also known as the global financial crisis.

• 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 responded to the global financial crisis by cutting the base interest rate to stimulate the economy.

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).

For example, a reduction in the base interest rate meant that many homeowners saw their mortgage repayments decrease, providing some relief during the economic downturn.

COVID-19 Pandemic and Recent Rate Changes

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.

The current base rate has since increased from this historic low, with several changes over the last few months as the Bank of England responds to inflation and economic conditions.

Recent Base Rate Changes

• December 2021: Base rate increased to 0.25% to tackle increasing inflation.
• February 2022: Base rate increased by 0.25% to 0.5%.
• 2023: Base rate peaked at 5.25%.
• January 2026: Base rate stands at 3.75% after a gradual downward trend.

Depending on how the UK economy performs, the base rate could rise further to combat inflation or fall if economic growth slows, impacting consumer spending and financial stability.

Let us see what the next chapter brings.

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. When a fixed rate period ends, borrowers often move onto the lender’s SVR (standard variable rate), which can change at any time and is usually higher than the fixed rate, affecting your mortgage payments.

Mortgage lenders in the UK offer fixed rate mortgages and fixed rate deals for up to 10 years, giving clients certainty of their mortgage costs and protecting them against rising interest rates. A fixed rate means your interest rate and monthly repayments remain unchanged during the fixed period, unlike variable rates that can fluctuate with the base rate.

Comparing mortgage deals and reviewing your current deal before it ends is crucial to avoid higher costs and secure the best rates. Consulting a mortgage broker, such as Mojo Mortgages, can help you find the most suitable mortgage deals, save money on monthly repayments and mortgage payments, and provide expert advice tailored to your needs.

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 [email protected]