Base Rate

The Bank of England's base rate (officially the Bank Rate) is the rate at which the Bank of England lends money to commercial banks overnight. It is the benchmark against which many UK lending rates are set. When the base rate rises, most variable-rate loans and credit facilities become more expensive; when it falls, they become cheaper.

Many UK business lending products are priced as base rate plus a margin. For example, a secured business loan might be priced at 'base rate + 4%'. If the base rate is 4.25%, the effective rate would be 8.25%. The margin reflects the lender's assessment of risk; the base rate component reflects market funding costs.

SONIA (Sterling Overnight Index Average) has largely replaced LIBOR as the reference rate for many variable-rate financial products since 2021, particularly for revolving credit, invoice finance, and some bridging products. SONIA tracks very closely to the base rate in practice.

Example

If the Bank of England base rate is 4.25% and your business loan is priced at base rate plus 5%, you pay 9.25% per annum. If the base rate falls to 3.75%, your rate becomes 8.75% - a saving of 0.5 percentage points.

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