Bank of England base rate

The base rate is the rate that the Bank of England (BoE) charges when it lends money to individual banks. It’s often used as a reference when banks set rates on their savings products for customers, which will usually move in line with it.

This could be seen in early 2023 - the BoE raised interest rates from 3.50% to 5.25% and savings rates subsequently rose across the market over the following months.

Source: Bank of England 07 January 2024

What is a savings rate and why do banks need savings?

Banks and building societies make their money by taking savings deposits and lending them out at a higher rate than they pay savers. The difference is called a ‘net interest margin’. The amount of money they need to bring in from savers is therefore dependent on the amount they are able and happy to lend. They don’t need an endless supply of money.

A savings interest rate can be thought of as the price a bank or building society needs to pay to attract the amount of money they need. Rates will therefore rise and fall in line with how much money they need to bring in to fund their lending activities.

Where can banks go to get this money?

Savers are just one place banks can go to get this money. Unlike building societies they can also borrow it from the BoE. If the BoE is lending money to banks at a low rate, there will be less incentive for the individual banks to offer higher rates to savers. Borrowing money from the BoE may also be easier than administering thousands or even millions of savings accounts.

Which banks have the best savings rates?

You’ll rarely see big high street banks offering the best savings rates. They benefit from having established relationships with millions of customers, who are often happy to save with the same bank they have their current account with.

Instead you’ll often find smaller ‘challenger’ banks and building societies offering the best interest rates. They don’t benefit from having a large brand or established relationships with a big customer base, so they need to offer headline rates to bring money in.

Sharia-compliant banks also tend to offer higher rates. They don’t pay an interest rate, but instead offer an expected profit rate, in line with Islamic banking principles.

More about Sharia savings products

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