Last Updated on September 19, 2023
The interest rates in the UK were stable in the 18th century, remaining at 4-5%. They became volatile near the 19th century, moving between 4 and 10%. The fluctuations extended in the 20th, with an unstable interest rate between 5% and 10%.
Analyzing historical data and how the interest rates have changed is an excellent example of central bankers’ measures to address the specifics of the different economic cycles.
In this post, we’ll cover how the interest rates changed over time in the UK, when they peaked, and what to expect in the next five years.
British Interest Rates in the Early Days
The first national interest rate was 8%, implemented by the Bank of England when it was inaugurated in 1694. Over the following 20 years, the rate dropped, which stimulated the flourishing of the Great British Empire’s economy.
The Bank of England’s early years were greatly influenced by the Government’s staggering demands for different financing alternatives and the issuance of new coinage.
The Bank of England also worked to provide funds for the war against France at the time.
Later, it launched a conventional banking business and accepted deposits from the public.
King William and Queen Mary were the bank’s two original stockholders.
The Royal Charter of 1694, granted by the King and the Queen, laid out the fundamentals for the bank’s operations. According to the charter, the bank was established to “promote the public Good and Benefit of our People.“
The UK was not officially formed until May 1707.
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The 18th and 19th Centuries
The Bank of England faced its first financial crisis in the 18th century after the South Sea Company threatened its position as the government’s main banking institution and owner of the national debt. The interest rates started fluctuating.
In 1716, the rate dropped to 4%, while in March 1719, it rose to 5%.
Next came the American Civil War of Independence, from 1775 to 1783. During that time, the interest rates remained unchanged.
Even the embargo imposed by Napoleon didn’t lead to an interest rate change.
However, after 103 years of stable rates, in May 1822, the interest rate dropped back to 4%. After that, changes became more frequent.
British Interest Rate in the 20th Century
The period from 1890 to 1933 was tumultuous because of World War 1. The suspension of the gold standard in September 1931 and changes in other monetary policy regimes significantly impacted interest rates.
Yet, during the period 1890 to 1910, short-term nominal interest rates remained stable.
When WWI ended with the Treaty of Versailles, the consequences were unlike what people had seen.
Germany had to pay war reparations, forced by France and Britain. However, it couldn’t bear its debt, which debunked its currency and paved the way for World War II.
After WWII, the world saw the biggest growth in its population. Many entered the workforce between the late 60s and early 70s. The spending increased significantly, including buying cars, homes, or other goods and services.
Inflation rates in the UK started rising and soon reached their highest level ever.
British Interest Rates in the Late 20th Century
In 1979, under the administration of Margaret Thatcher, the government increased the British interest rate to 17% to tackle inflation.
The rise in interest rates succeeded in taming inflation, although there was a negative impact on the UK’s exports of manufactured goods.
The base interest rates fell to 9% from 17% in 1979 and rose again to 14.88% in October 1989.
The Black Wednesday
Then came Black Wednesday on 16th September 1992, when the UK withdrew from the European Exchange Rate Mechanism (ERR).
Also known as the “sterling crisis,” the UK was forced out of the ERR because it couldn’t prevent the pound’s value from falling below the limit set by the ERR.
The withdrawal from the ERR resulted in an interest rate spike, with levels reaching 12%. The prime minister at the time, John Major, promised to increase the rate to 15%, but that didn’t happen.
Blair and Brown’s Impact on Interest Rate in 1997
Along with Gordon Brown (the chancellor at the time), Blair took over controlling and setting the base interest rates of the Bank of England to achieve the government’s inflation target of 2%.
Between 1990 and 1995, UK residents also experienced house repossessions caused by the high interest that made real estate unaffordable. The interest rates dropped from about 13% in the early 1990s to 6% in 1996.
British Interest Rates in the 21st Century
The interest rates increased from 3.5% in July 2003 to 5.75% in July 2007 in response to an over-inflating economy.
Then came the Global Financial Crisis in 2008. The base interest rate fell to 6% – its lowest in 300 years.
The 5.75% interest rate nosedived to just 0.5% in March 2009. The Bank of England started printing money to boost the economy – a process called “quantitative easing.”
British Interest Rates in the Past 10 Years
The period from the 2010s to pre-COVID times was steady.
The global financial crisis of 2008 kept the interest rates at record-low levels. From the dramatic fall to 0.5% in March 2009, the interest rate fell again in August 2016 to 0.25%.
This was followed by a slight increase to 0.5% in November 2017 and 0.75% in August 2018.
The COVID-19 Pandemic and Its Effect on UK Interest Rates From 2020 to 2022
When the lockdown was imposed in March 2020, the interest rates fell to a historic record low of 0.10%. This happened for the first time in the bank’s 325-year history, and the rate remained at 0.10% until November 2021.
The base rate then appreciated to 0.75% in March 2022. From then on, it rose steadily, reaching 2.25% in September and 3.5% in November 2022 – the highest rate recorded in the past 10 years.
What is the Highest Interest Rate in British History?
The highest-ever interest recorded was in November 1979 under the conservative government of Margaret Thatcher. Her administration increased the interest rate by a staggering 17% to reduce the growing inflation at the time.
What Are the Key Changes to British Interest Rates Since 2021?
The cost of living and inflation surged by 5.1% in 12 months. This provoked the BoE to raise interest rates for the first time in 3 years by 0.25%.
Proceeding to the key changes in 2022, the BoE voted 5-4 to increase the rate again in February. This marked the first back-to-back increase since Tony Blair was prime minister.
Another increase followed shortly after, this time by 0.75% – the highest since the pandemic started.
The inflation ran at a 40-year high in June, so interest rates were increased to 1.25%.
In October 2022, inflation peaked at 11.1%, provoking the BoE to increase the interest rates further.
In November, the MCP voted by 7 to 2 to hike the interest rates by 0.75%, the biggest single rise since 1989, which brought the level to 3%.
What Will Happen to British Interest Rates in the Next 5 Years?
The monetary policy committee voted the interest rate to be 5% in June 2023 – the highest rate in the UK for the last fifteen years. The future, however, is uncertain.
What the economy will look like in the next few years mostly depends on where inflation goes.
Since the UK inflation remains high, economists believe the interest rate will hit 6.5% by the end of 2023 or the start of 2024.
After reaching a record high in the last 15 years, the UK interest rates are expected to fall in 2024 and 2025 to between 3 and 4%. They will likely stabilize between 3% and 3.5% between 2025 and 2027.
To Wrap Up
The Monetary Policy Committee meets every six weeks to review how the economy is doing, whether the inflation rate is persistent and whether the interest rates should be changed.
However, given the economic uncertainty, the future of interest rates in the UK cannot be predicted precisely.
