Tuesday, November 04, 2008

How is the Bank of England official interest rate meant to work ?

As the political row gets going about changes in interest rates getting passed onto borrowers (or not ), I realise that I don't fully understand the mechanism by which this all works.

The Bank of England web site says:

    The Bank of England sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.

But 'how much' does the Bank of England lend and on what terms ? What are the limits and where does the money come from ?

I seem to remember something about Banks having to make deposits with the Bank of England etc - but its been a long time since 'O' level Economics and I'm a bit rusty here. Anyone know a good site to explain all this ?

Update: I have yet to find on the net any proper explanation of all this or to hear one. ( Robert Peston of the BBC comes closest ).

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