A bank ‘base rate’ is a variable interest rate set by individual banks and used as a reference when lending to borrowers. Where a bank accesses funds from money deposited by customers or raised from other investors, its cost of lending is:
• the amount it must pay to its depositors or other investors to attract their business (eg the interest it offers to its customers), plus
• certain associated costs of lending (known as mandatory costs)
Banks use those amounts to determine
their 'base rates' which they then use to benchmark the interest they charge to their borrowers.
The Bank of England has its own base rate, known as the Bank Rate. This determines the interest rate the Bank of England pays to commercial banks that hold money with it and typically influences the individual banks’ base rates.