Interest Rates and Monetary Policy: Key Economic Indicators

Major central banks around the world tightened monetary policy in response to rising inflation, initially caused by higher goods and energy prices, as well as bottlenecks in global supply chains. Some are now beginning to cut rates.

UK (Bank of England)

On 19 September, the Bank of England’s Monetary Policy Committee (MPC) announced it left interest rates unchanged at 5.0%. The MPC vote was 8 members in favour of unchanged rates and 1 in favour of a cut. At the previous meeting, the MPC reduced rates for the first time since the pandemic.

The MPC’s previous cycle of rate increases – from 0.1% in December 2021 to 5.25% in August 2023 – came in response to high inflation, which peaked at 11.1% in October 2022. Since then, inflation has fallen, and was 2.2% in August 2024 on the CPI measure – slightly above the MPC’s target of 2%. The Bank of England expects the inflation rate to rise temporarily to 2.5% by the end of 2024, before falling again in 2025. 

The results of the next scheduled MPC meeting will be announced on 7 November.

The MPC is reducing the size of its asset purchase – or quantitative easing, QE – programme from its peak value of £895bn to £660bn on 11 September 2024. It is doing this by letting some of the government bonds it holds mature and by actively selling some of the bonds it holds to the market. At its September 2024 meeting, the MPC said it planned to reduced the size of the assets it holds by a further £100bn over the next year.

QE consists of the Bank creating new money electronically (as central bank reserves) and then using it to purchase financial assets, mostly government bonds.

In March 2020 the Bank introduced measures in response to Covid-19. Interest rates were cut to 0.1% – the lowest they have ever been. They remained at this level until December 2021. The MPC also expanded its quantitative easing (QE) programme by £450bn in 2020 and 2021, taking the total value of assets it owned to a peak of £895bn. For more, see section 4.2 of the Library briefing paper, Coronavirus: Economic impact.

United States (Federal Reserve)

Interest rates were cut by 0.5 of a percentage point to a range of 4.75% to 5.00% by the Fed at its policy meeting ending 18 September. This was the first rate reduction since the pandemic. The Fed indicated further cuts could be on the way. Inflation was at 2.5% in August, although the Fed said “further progress” had been made toward meeting its 2% target. The Fed slowed the pace it reduces the assets it holds in its Quantitative Easing programme from $95bn to $60bn per month from June.

The Fed’s next scheduled policy meeting ends on 7 November.

Responding to the Covid-19 pandemic, the Fed had by 15 March 2020 cut interest rates to close to 0% from 1.5%‑1.75% prior to the pandemic. On 23 March 2020, the Fed announced a wide range of measures designed to support the economy. This included buying debt from the government, corporations and purchasing other securities (such as those backed by mortgages and other assets). The Fed began to raise rates again in March 2022, taking them from 0-0.25% to 5.25-5.50% in July 2023. 

Eurozone (European Central Bank)

At its 12 September 2024 meeting the ECB cut its main interest rate by 0.25 of a percentage point, with the deposit rate lowered from 3.75% to 3.5%. This was the second time the ECB has cut rates since its cycle of rate rises ended in September 2023 (the first cut was in June 2024).

The ECB, since March 2023, is unwinding one of its main quantitative easing programmes, with reductions to the overall size of its pandemic-related QE programme in the second half of 2024.

The ECB launched its pandemic response on 12 March 2020 and expanded it significantly on 18 March and 4 June. The ECB has also made cheap loans available to banks to encourage them to lend to businesses.

In July 2022, the ECB announced the creation of a new bond purchase programme, the Transmission Protection Instrument (TPI). The TPI is designed to be used, if needed, to lower government borrowing costs in individual countries, if these costs are rising due to “unwarranted, disorderly market dynamics”. 

This briefing is part of our Economic Indicators series. Visit the main Economic Indicators page to see data on other parts of the economy.