How does the base rate effect savings/borrowing rates?

sh856531

Hi Guys,

Can anyone point me in the direction of a resource that explains in plain English why the BoE base rate effects the rate at which a commercial bank will lend to me?

I've seen various explanations of how its something to do with the amount that the BoE charges each of the main banks to borrow money overnight or something like that. I don't know if thats true, but if it is, I don't understand why (credit crunch aside) commercial banks would want to or need to borrow money from the BoE so frequently that the rate the BoE charges would effect each banks eventual lending/savings rate.

Can anyone help me understand this please? I've studied economics in the past and I thought I did understand how this works but whenever I think I've got the basic principal, I totally forget how it works.

It doesn't help that all the books I've read on the matter seem to explain it in gibberish! :-)

I'm sure the basic concept is very simple though... Can anyone help?

Many thanks all

S