Why Are Interest Rates in the News Right Now?

With the next Bank of England Monetary Policy Committee (MPC) meeting scheduled for 7 August 2025, you might be hearing a lot about interest rates in the news. What do they actually do, and why do they matter?

This guide is designed to help GCSE and A-Level Economics students understand how interest rates work, what the interest rate transmission mechanism is and how it all connects to inflation, borrowing and spending in the UK economy.

What Is the Interest Rate Mechanism?

The interest rate mechanism is how the Bank of England uses interest rates to manage the UK economy. It is a key tool in monetary policy, helping control inflation, support growth and influence consumer behaviour.

The MPC’s decisions shape the economic conditions we all experience.

Understanding Inflation: Causes, Effects & Measurement in the UK Economy

What Happens When Interest Rates Fall?

When the Bank of England cuts interest rates:

• Borrowing becomes cheaper – mortgages, loans and credit cards cost less
• Spending increases – consumers are more likely to buy goods and services
• Saving becomes less attractive – returns on savings accounts fall
• This boosts aggregate demand in the economy, which can help raise inflation if it is too low

What Happens When Interest Rates Rise?

When interest rates go up:

• Borrowing is more expensive, which discourages spending
• Consumers and businesses may cut back on big purchases
• Saving is more attractive, reducing the amount of money flowing into the economy
• This slows aggregate demand, helping bring inflation down

Understanding Aggregate Demand: A Student’s Guide

The Interest Rate Transmission Mechanism

This refers to how changes in interest rates affect the real economy:

1. The Bank of England changes the base rate
2. This influences commercial interest rates (like mortgages and loans)
3. People adjust their spending and saving habits
4. Aggregate demand in the economy rises or falls
5. This affects inflation and economic growth

Why Does This Matter Ahead of August 2025?

At the August 2025 MPC meeting, the Bank of England will decide whether to cut, raise or hold interest rates, based on inflation data and economic trends. This is a real-world application of the theories you study in school.

Understanding how interest rates work helps you:

• Apply macroeconomic theory
• Analyse exam case studies
• Stay ahead in A-Level and GCSE Economics

A Quick Recap for Exams

• The Bank of England uses interest rates to meet its 2% inflation target
• A rate cut boosts spending and investment
• A rate rise reduces aggregate demand and controls inflation
• The transmission mechanism links monetary policy to real economic outcomes

Do You Need Help with A-Level or GCSE Economics?

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