The Bank of England, inflation & your savings: what you need to know

A quick look at monetary policy

The purpose of the BoE’s rate changes is to keep inflation around a target set by the government of 2%. It has several tools to meet this target, the primary one being tweaking the base rate – that’s the interest rate it charges commercial banks, directly affecting how expensive it is for banks to access funds. When inflation is high, the BoE might raise rates to slow borrowing and encourage saving. When inflation is low, it may lower rates to encourage more borrowing and investment.

Amjad Khan, Head of Savings at Marcus by Goldman Sachs explains: “The Bank of England’s rate decisions are all about balance. Raising rates too quickly can stall growth, while holding off too long can let inflation get out of hand. It’s a fine line, but the aim is usually to support long-term economic stability.”

How interest rate changes affect the pound

Interest rate movements can ripple through the economy in a few key ways:

• Investor confidence: Higher rates often attract foreign investors seeking better returns, which can strengthen the value of the pound.
• Foreign exchange markets: A stronger pound can make imports cheaper and overseas travel more affordable – but it can also make UK goods more expensive abroad.
• Growth prospects: Whilst rate increases might curb inflation, they can also slow borrowing and spending, which can impact business growth and job creation.

What does this mean for you?

Changes in interest rates don’t just influence economic indicators – they shape everyday financial decisions. Here are some of the most noticeable effects:

The cost of goods
When inflation rises faster than savings rates, the value of your money may not go as far as it used to. Groceries, transport and other essentials can feel more expensive – even if your income hasn’t changed.

Travel expenses
A weaker pound means holidays abroad can get pricier, from flights and hotels to everyday spending. On the flip side, a stronger pound can make foreign travel more affordable.

Savings rates
Higher base rates typically lead to better interest rates on savings accounts, which is great for savers. However, it's important to note that other factors like market position and market changes can also influence these rates.

Different savers, different strategies

Interest rate changes can affect people in different ways depending on their financial goals and stage of life.

If you're actively building your savings, changing interest rates could impact your short-term strategy. Even a small increase in interest can make a noticeable difference over time, so it’s worth checking you’re getting a competitive rate in an easy access account, such as our Online Savings Account.

If you’re focused on preserving what you’ve already built, stability can be the key. Keep an eye on inflation and aim to protect your purchasing power. This means avoiding unnecessary risks and ensuring that your savings are protected, meaning a product like our 1 Year Fixed Rate Saver might be right for you.

The final word

Understanding how the BoE’s interest rate decisions influence inflation and your savings is a valuable step towards better money management. Whilst you can’t control the economy, you can stay informed, make confident choices, and adapt your savings strategy to the current climate.

Want to learn more about how to grow your savings? Check out our savings tips here.