Interest Rates

When you get your credit card statement or the monthly bill for your loan, you will notice that it is usually a little bit higher than it would be if you took the actual amount of your loan and divided it over a certain amount of months. There are a number of factors affecting the amount of money you pay on your loans and credit cards each month. Each financial institution can add finance charges, taxes and fees, but usually the deciding factor on how much you will pay each month is the interest rate.

Interest rates vary according to what kind of loan you are taking out or what kind of credit card you have. Often they depend upon how much money is being loaned or used by the credit holder. The most annoying thing about interest rates is not so much that they exist, but that they fluctuate. What you are charged in interest today might not be what you are charged in interest next year. So who decides these interest rates?

In the UK, interest rates are determined by the Monetary Committee of the Bank of England. Interest rates used to be decided by the Chancellor of the Exchequer, but that got changed in 1998.

There are a number of factors that go into deciding what the current interest rate should be.

The first is the expected rate of inflation—meaning how much the cost of goods is going to go up. Over time the cost of goods goes up. This is why you are so often subjected to hearing people grumble “when I was young I only had to pay” etc. As the inflation rate changes, the interest rates will change with it.

Another factor that goes into determining the current interest rate is the current exchange rate on the global market. The exchange rate refers to how much the UK’s money is worth compared to other countries forms of currency. For example one British pound is worth two US dollars. This means that the interest rates in the UK are going to be a little bit higher than they are in the US because in the global market, the currency of the UK is more valuable.

These are just two of the factors taken into consideration when the Monetary Committee of the Bank of England decides the current interest rate. So when you go into your bank and they quote you a certain interest rate, keep in mind that it isn’t your bank that decided that figure, it was the government bank…and that it can change.

For detailed financial information on how the UK’s interest rates are determined, check out this publication by the European Parliament
*image from Blue Roof.Com Blog