Target Two point zero

The purpose of this is to provide a reasonable general explanation of how the Bank Of England decides on the interest rates . Factors influencing interest rates are of great interest not only to economists but also to common citizens planning on mortgaging a home or financing large purchases . Therefore , it is very important that all citizens understand certain economic principles and trends that help to predict interest rate fluctuations over a long period of time

Real interest rate is determined by a number of macroeconomic indicators , including the amount of money saved

in the economy , business demand for these funds to be used to finance new development , and the government 's net supply of funds or demand for funds

As the website of the Bank of England suggests , interest rate is linked to a number of other phenomena -- inflation , growth , manufacturing consumers , exchange rates , exports , employment , wages etc . It is of paramount importance to view interest rate in the context of the national monetary policy interest rate is , in the first place , a practical policy tool

The chief objective of interest rate as a policy tool is to control inflation . Every time inflation gets out of control , the Bank Of England has to raise interest rates to make it fall gradually . However , the Bank has a hard task of balancing inflation and business growth rate . When interest rate is too high , it hinders business development

In predicting and assessing inflation , the Bank Of England has to take into account a varied types of macroeconomic indicators . In the Bank 's quarterly Inflation Report on which the Bank 's Monetary Policy Committee 's interest rate decisions are grounded , the following indicators are looked into : money and asset prices demand output and supply analysis of costs and prices and the medium-term inflation prospects and risks

Yet it is necessary to keep in mind that the interest rate is determined by the balance between supply and demand in the financial market . The demand in the financial market is formed by the willingness of citizens to spend and borrow money . The supply in the financial market is determined by the government 's decision to emit a certain quantity of money . Thus , the primary goal of the Bank Of England is to sustain this balance between supply and demand any significant shift in either supply of or demand for money calls upon a reconsideration of the national monetary policy

Increase of interest rates acts as a disincentive for borrowers , so the demand for money drops , which , in turn , leads to alleviation of inflationary pressures on the economy . The reasons for the emergence of inflationary pressures are varied for instance , they can be caused by quick increase in wages , unreasonably optimistic expectations in the market , or abundant lending activity by financial institutions

Going deeper into the analysis of inflationary pressures on the economy the understanding of pressures on demand is the key to projecting and measuring future inflation

`The pressure of demand on resources can...