In the world of economics, the base rate – the interest rate set by central banks – is a powerful tool, shaping everything from consumer spending to inflation. But its history is far from straightforward, changing over centuries to meet shifting economic needs. Founded in 1694 the Bank of England (BoE) was tasked with financing the government’s war debts. Firstly, it set an interest rate (which was initially known as the 'bank rate') to lend to other banks, balancing the nation’s financial demands with market conditions. Early rates were around 6%, but this was just the beginning of a much more complex relationship between interest rates and the economy.
 

In the 18th and 19th centuries, the base rate played a key role in ensuring the British pound remained tied to the gold standard, this meant the UK’s currency was fixed to a specific weight of available gold. However, in 1931 Britain departed from the gold standard, allowing monetary policy to focus on Britain’s economic health. Following World War II, the base rate became a formal tool in managing national economic goals, such as controlling inflation and stabilising demand.
 

The 1970s and 1980s brought a new challenge with soaring inflation. In response, the Bank of England raised rates rapidly, with the base rate peaking at a staggering 17% in 1979. This high base rate was part of a tough monetary policy designed to stop inflation, but this also led the UK into a recession. As time passed, the base rate gradually came down, and by the start of 1998 it had reduced down to 7.50%. The BoE’s newfound independence in 1998 marked a major shift, allowing it to set rates free from political pressure, while inflation remained under control.
 

The 2008 global financial crisis created an era of ultra-low rates, with the BoE reducing rates to just 0.5% by March 2009 in a desperate bid to stimulate economic growth. Rates stayed low for over a decade, and in 2016, the vote for Brexit saw them dip even further to 0.25%. In 2020, during the COVID-19 pandemic, the BoE dropped rates to a historic low of 0.1% to cushion the economic blow.
 

However, as inflation started to increase in 2022, by August 2023 the BoE increase rates to 5.25% attempting to combat rising prices. With inflation easing and the economy showing signs of slowing in 2024, the BoE began to reduce the base rate. This downward shift has continued, with markets and analysts closely watching to see if it signals a longer-term return to lower rates, or if future economic challenges will prompt a shift in strategy once again.