The UK Money Markets

The Base Rate is the interest rate at which the Bank of England lends to other financial institutions. Changes to this rate have an impact on the interest rates set out by banks, building societies, and mortgage lenders, and as a result, borrowers, and landlords.

The MPC (Monetary Policy Committee) typically meets on a monthly basis to discuss activity in the economy, as the Base Rate has a heavy influence on not just inflation, but also the balance between supply and demand in the market. Members of the Committee can each vote, with the Governor able to have a casting vote in the result of no majority.

Reductions in the Base Rate typically occur when demand falls to such a level that we start to see unemployment rise and businesses closing. On the other hand, when the Base Rate increases, it is likely because the demand outstrips supply levels, and inflation is on the rise.

From March 2009, the Base Rate was at 0.5% until August 2016 when it was reduced to 0.25%. It wasn’t until November 2017 that it returned to 0.5%, and it continued to climb the following year in August of 2018 to 0.75%. When the pandemic first hit in March 2020, the Bank of England quickly reduced the Base Rate to 0.25% on the 11th of March, and then again to just 0.1% only a week later. December 2021 saw the first increase in the Base Rate since 2018, from 0.1% to 0.25%, and since then, the Base Rate has climbed to 5.25%. Given the latest ease in inflationary figures, we expect to see the first Base Rate decrease by summer 2024. 

SWAP rates are what lenders pay to financial institutions and corporations in order to acquire fixed funding for a specific period of time. This could be anywhere between one to ten years, but is typically a two-, three-, five- or ten-year fixed rate. The cost of this SWAP rate will then be used to price up mortgage products for lenders to ensure a profit margin.

Some lenders will have sophisticated SWAP rate money management programmes and will be in a position to offer a fixed term from the completion date, whereas others will work to an end date.

The Sterling Overnight Index Average, or SONIA, reflects the average interest rate that banks will pay to borrow sterling overnight from other banks, building societies and financial institutions. These institutions will use SONIA in many different ways, but primarily to calculate the affordability of their transactions.