How the base rate works
If the Bank of England wants to inflate the money supply, it will increase the base rate to incentivise borrowing. Since additional borrowing creates additional customer deposits, the money supply increases. If the Bank of England wants to deflate the money supply or reduce the rate of expansion, it will increase the base rate to decentivise borrowing.
Effect on borrowing rates
The base rate represents the cost at which commercial banks can borrow money from the Bank of England or each other. Banks pass on this cost to businesses and individuals. Hence, if the base rate is lowered, interest rates on mortages and loans tend to fall, and if the base rate is increased, interest rates tend to rise.
Effect on savings rates
Savings rates also tend to rise and fall with base rates. When the base rate rises, banks are more likely to offer higher interest rates on savings to attract deposits. This is because they face higher borrowing costs and need deposits as a funding source. Conversely, when the base rate is lowered, the return on savings accounts usually decreases.