Appreciate this is more of a r/nostupidquestions post, but it might work differently around the world so wanted to get the UK answer. I have googled but just get posts about how the base rate affects your mortgage, nothing with the bigger picture.
So the Bank of England puts the cost of borrowing up to 3%… Nationwide (for example) adds 3% to whatever THEY were charging YOU to borrow money from them. So your rate becomes, say, 7%. 4% of that 7% goes to Nationwide, but 3% is passed on to the BoE… Then what happens to it there? It’s a huge amount of money, probably equivalent to a massive tax hike – so where does it go?
And bonus q – if it goes back into the public purse eventually somehow, could we see something positive to come out of this in the long term? Eg. funding to the NHS, libraries, public transport?
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Savings interest rates also go up so I would expect some would go towards that.
Some of it goes back to savers (the interest rates should go up too to some degree), some of it will go to external lenders, who Nationwide borrow money from in order to provide mortgages.
To people the BoE/Govt owe money to in turn.
Rich people, pension funds, other holders of gilts and bonds.
That’s not how central bank interest rates work.
Interest rates are determined by the wholesale market of lenders and borrowers. When the BOE ‘set’ interest rates they are reducing the money supply in order to affect the wholesale market. They do this by selling assets they hold (mostly gilts and bonds) and then destroying the money they get from the sale. In the old days it would be bundles of £20 notes going into a furnace, now it’s sort of the computerised equivalent
Nowhere- savings rates go up too. The banks aren’t paying the3% to the government or BoE.
Higher borrowing costs and more incentives to save are meant to reduce spending/demand and thus inflation
(Sticking with Nationwide as you used it but insert ANOther lender/bank)
None of the 7% the Nationwide charges goes to the BofE *unless* the Nationwide is borrowing from the BofE. Most of the money the Nationwide lends is not from the BofE but money savers have deposited with them. So whatever the difference is between what the Nationwide charges borrowers and what they pay savers is the Nationwide’s profit.
The 3% is what the BofE charges if you borrow money from them (you or I can’t do that directly). That 3% goes into the treasury coffers to pay for everything government pays for on our behalf so your “NHS, libraries, public transport” etc.
For decades the public purse has been running a deficit – is spends more than comes in. So this extra cash coming in from the interest rate increase still doesn’t see the UK paying down our national debt – it’s still increasing. Partly this is because the BofE raises rates in sync with the interest we’re having to pay to service this national debt (which we’ve borrowed from domestic and international investors which includes other nations).