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How are interest rates set?

Since 1997, the setting of the Bank of England rate (sometimes known as the base rate) has been the responsibility of the Bank’s Monetary Policy Committee (MPC), which consists of eight economists and the Bank of England governor. They meet at the start of every month, and their decision as to whether to raise, cut or freeze rates is announced at noon, usually on the first Thursday of the month.

The MPC’s main aim is to keep inflation, as measured by the Consumer Prices Index (CPI), at or within 1% of its target of 2%. Its secondary aim is to support the government’s economic objectives of maintaining growth and reducing unemployment.

Broadly speaking, if inflation is above its target, the Bank will be looking at raising interest rates. And if inflation is below its target, it will be thinking about cutting interest rates. However, a number of other factors, such as levels of growth in the economy, and unemployment, will also be taken into account. If the economy is weak, the Bank may still choose to cut interest rates even if inflation is currently above target. Conversely, the Bank may choose to increase the rates if it believes the economy is overheating.

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