The 2% inflation target and why higher interest brings prices down

The UK Government sets the Bank of England a target of keeping inflation at 2%, measured by the Consumer Prices Index (CPI)¹. The Bank's Monetary Policy Committee, a group of nine people, is the body that has to deliver it, and its main tool is Bank Rate, the interest rate the Bank of England sets for the whole UK economy².

Inflation has been a long way from that target in recent years. It peaked at 11.1% in October 2022, the highest rate in four decades, before falling back to the 2% target by June 2024⁴. Since then it has drifted up again: CPI rose by 3.1% in the 12 months to August 2026⁵. Bank Rate, having reached a peak of 5.25% in August 2023, was cut steadily to 3.75% by December 2025 and has stayed there since².

This page explains where the 2% target comes from, who is accountable for it, how raising interest rates is meant to bring prices down, and what Bank Rate means for your mortgage, loans and savings.

The UK inflation target: 2% on the CPI measure

The Government's target is not a range and not zero: it is 2%, and it is defined on one specific measure of inflation. The Bank of England states it plainly: "The Government sets us a target of keeping inflation at 2%"¹. The measure the Government asks the Bank to target is the Consumer Price Index³. The Office for National Statistics confirms that CPI "is also used to set the operational inflation target for UK monetary policy", alongside its role in uprating working-age benefits and tax credits⁵. CPI is also the only UK inflation index currently designated as an Accredited Official Statistic⁷.

Other measures exist and are published alongside it, but they are not the target. In the 12 months to August 2026, CPI rose by 3.1%, while the annual RPI inflation rate was 3.4%⁵. Core CPI, which excludes energy, food, alcohol and tobacco, rose by 2.6% over the same period⁵. The Household Costs Indices, which track the inflation actually experienced by different household groups, sat 0.2 percentage points away from the CPI rate for all households in June 2026⁸. The separate measures are explained in more detail on CPI and CPIH, RPI and the Household Costs Index.

The recent history of CPI shows how far inflation can travel. It rose from under 0.5% in February 2021 to a peak of 11.1% in October 2022⁴, driven by strong global demand for consumer goods, supply chain disruption and soaring energy and fuel prices⁹. It then fell gradually to reach the Bank of England's target rate of 2% by June 2024⁴. After that it moved again: from a low of 1.7% in September 2024 to a post-election peak of 3.8% in July, August and September 2025, before falling back slightly to 3.6% in October 2025¹⁰. By June 2026 CPI stood at 2.6%, and by July 2026 it had picked up to 2.9%¹¹.

The UK's experience has been broadly in line with its neighbours, though usually a little higher. In June 2026 the UK CPI rate of 2.6% was lower than the EU rate of 2.9% but higher than France (2.0%) and Germany (2.4%)¹¹. In August 2026 the UK's 3.1% was higher than the first estimates for both France (2.7%) and Germany (2.9%)⁵.

Who sets the target and who has to hit it

The division of labour is fixed: the Government sets the target, and the Bank of England has to hit it. The Bank describes its statutory objective as "monetary (price) and financial stability"¹. The target itself comes from the Government's remit to the Bank, and the Bank does not choose the number¹.

The people who actually make the decisions are the Monetary Policy Committee (MPC). It has nine members: five internal members who are already employees of the Bank, and four external members, appointed by the Chancellor for a fixed term, who come from outside the Bank with relevant knowledge or experience¹. The membership structure is set out in the Bank of England Act 1998, and the committee's decision process follows the Bank of England and Financial Services Act 2016, reflecting recommendations made by the 2014 Warsh Review¹. The Governor appoints the Chief Economist, who sits on the committee, after consultation with the Chancellor¹.

The MPC's instrument is Bank Rate. The Bank defines it as "the rate of interest we pay to commercial banks, building societies and financial institutions that hold money with us"¹. It is the core interest rate in the UK, and setting it is the Bank's job¹³. When inflation is above target, the committee's task is to use Bank Rate to bring it back down; when inflation is below target or the economy is weak, the same tool works in reverse. The committee also has other tools, among them quantitative easing, which the Bank has used to stimulate the UK economy since the 2008 financial crisis¹, covered in full on quantitative easing and quantitative tightening.

When inflation strays from 2%, the practical response is a change in Bank Rate and a published explanation of why. The Bank's forecasts set out the path it expects: in late 2024 its forecast was for inflation to rise to 2.8% in 2025 before gradually easing back towards 2% in 2027⁴, and by September 2026 it was projecting inflation to peak at 3.2% in the final quarter of 2026¹⁴.

Higher interest rates bring prices down by reducing spending

The mechanism the Bank of England relies on is spending. Its own explanation is direct:

Higher rates reduce spending through several channels at once. Borrowing becomes more expensive, so households and businesses take out fewer and smaller loans, and existing borrowers on variable rates see their monthly payments rise, leaving less to spend on other things. Saving becomes more rewarding, so some money that would have been spent is held back instead. The Bank also notes a second channel: "Higher interest rates can also increase the value of the pound compared to other currencies"³, which makes imports cheaper and helps hold down the prices of goods brought in from abroad.

The Bank is clear about why it uses this tool:

The Bank of England's main tool for bringing inflation down and keeping it low is raising interest rates. Higher rates reduce spending, which eases the pressure on prices. The Monetary Policy Committee reviews the evidence and makes a decision about every six weeks³.

The inflation the UK experienced from 2021 came from the other direction: too much demand chasing too few goods. The Office for Budget Responsibility traced CPI inflation rising "from 0.6 per cent in the first quarter of 2021 to around 9 per cent in the fourth quarter of 2022"¹⁵, as the economy recovered from the pandemic while supply chains and energy prices were disrupted⁹. At its peak the rate reached 11.1%, the highest of the last four decades¹⁶. Higher interest rates were the response, and the falls in inflation that followed, from 11.1% in October 2022 to the 2% target by June 2024⁴, came as those rates worked their way through household and business finances.

The cost of that mechanism falls unevenly. People with mortgages and other variable-rate debt feel higher rates first and hardest, while savers benefit from better returns. The Scottish Government's analysis of the cost of living crisis records how the two sides of the same policy pulled in opposite directions on household budgets⁴. What higher rates do to a household's own finances, month by month, is covered in how a Bank Rate change affects your mortgage payments and real returns on savings.

Rate changes take up to two years to work

Interest rate changes are not instant. The Bank of England is explicit about the delay:

That lag exists because the economy adjusts in stages. Banks and building societies pass changes in Bank Rate through to new and existing borrowers at different speeds, depending on the type of mortgage or loan. Fixed-rate borrowers notice nothing until their fix ends. Businesses reprice investment plans over quarters, not weeks. Wages, rents and contracts respond more slowly still. By the time spending has fully adjusted, a year or more has typically passed, and the effect on prices takes longer again.

The evidence of the lag is visible in the housing market. The effective interest rate on new mortgages in the UK fell only from 4.53% to 4.5% between two recent quarters, a small movement despite larger changes in the wider rate environment¹⁷. House prices respond even more slowly: annual UK house price inflation stood at 0.0% in the 12 months to March 2026, with England's annual rate at negative 0.7% over the same period¹⁸. A rate change made in one year is still working its way through house prices, rents and wages well into the next.

The lag also reaches the benefits system. Inflation rates are used to uprate benefits each year, but with a lag of up to 18 months¹⁵. That is why working-age benefits were uprated in April 2023 in line with CPI inflation of 10.1%, the rate measured a year and a half earlier, at the height of the price surge⁴. The same delay explains why household budgets can feel the cost of a rate rise long before any inflation-linked increase catches up. How those increases are set is covered in how inflation sets increases to benefits, State Pension and tax thresholds.

The two-year lag has a consequence for how decisions are made: the MPC cannot wait for inflation to move before acting, because today's inflation reflects rate decisions from up to two years ago. In July 2023, with Bank Rate at 5.25%, markets were pricing in a further peak of around 6.2% in early 2024¹⁹, a judgement about where inflation would be, not where it was.

How the Monetary Policy Committee decides Bank Rate

The MPC meets about every six weeks, eight times a year, to look at the evidence and decide Bank Rate¹. Its decision, with minutes of the meetings, is published at midday on the Thursday of the decision week¹. Since 2015 the committee's second and final meetings have been recorded, and transcripts will be published after an eight-year delay¹.

The committee's nine members do not always agree, and the votes of each member are published with the decision, so it is possible to see how close each call was¹. The mix of five internal and four external members is designed to bring both institutional knowledge and outside expertise to the table¹. The full membership, meeting schedule and how the votes work are covered on the Monetary Policy Committee page.

The evidence the committee weighs includes the latest inflation data. Before its September 2026 meeting, the Bank of England was granted exceptional pre-release access to an estimate of consumer price inflation data at 10:00am on Monday 14 September 2026, two days before the figures were published to everyone else⁵. The next rate decision was set for 17 September¹⁴. As of the second quarter of 2026, the committee had kept Bank Rate unchanged at 3.75% at its last four meetings⁶.

From 5.25% peak to 3.75%: how rates have moved

Bank Rate's recent path is the clearest illustration of the target in action. From 0.1% in December 2021, the Bank raised rates 14 consecutive times to 5.25% by August 2023⁹, a series the Office for National Statistics describes as increasing the bank rate 13 times from 0.25% to 5.25% between January 2022 and August 2023²¹. The purpose was to bring down the inflation that had peaked at 11.1%¹⁶.

Once inflation was back at the 2% target in June 2024⁴, the direction reversed. The Bank cut rates twice in 2024, in August and November, from 5.25% to 4.75%⁴. It then lowered rates three times in 2025, from 4.75% to 4% by August²², and continued down to 3.75% in December 2025². Through the first half of 2026 the rate has been held at 3.75% at four successive meetings⁶.

Inflation moved along its own path over the same period. It fell to 2.6% in March 2025 before rising again to 3.8% in July 2025²², then eased to 3.6% by October 2025¹⁰. Core inflation, excluding energy, food, alcohol and tobacco, fell from 3.7% in January to 3.6% in August 2025²². By mid-2026 inflation had picked up again, to 2.6% in June and 2.9% in July¹¹, with the Bank projecting a peak of 3.2% in the final quarter of 2026¹⁴. The full record of past changes is on Bank Rate history.

What Bank Rate means for your mortgage, loans and savings

Bank Rate is the anchor for the interest rates households actually pay and receive. The Bank of England describes it as the core interest rate in the UK, and notes that "we set the interest rate, which impacts the cost of getting a mortgage"¹³. Commercial banks and building societies hold money with the Bank and earn Bank Rate on it¹, and the rates they then charge borrowers and pay savers are built around it. The Bank of England base rate influences the rates banks pay individuals on their savings, and it increased from 0.75% to 4.25% during the tax year 2022 to 2023²⁴.

The pass-through is not uniform. The effective interest rate on new mortgages moved only slightly, from 4.53% to 4.5%, across two quarters of 2025¹⁷, because fixed-rate deals are priced off longer-term market expectations as much as off Bank Rate itself, as explained on gilt yields and fixed mortgages. Existing borrowers on tracker or standard variable rates see changes much faster. Scottish Government analysis of the period from August 2023, when Bank Rate stood at 5.25%, through August 2024, when a cut had brought it to 5%, records the feed-through of higher rates to higher borrowing costs for households²⁵. In December 2023, with Bank Rate at 5.25%, the Bank's own financial stability reporting highlighted the pressure on mortgaged households²⁶.

For borrowers in difficulty, the state's own support is tied to Bank of England figures. Support for Mortgage Interest, the benefit that helps with mortgage interest payments, is calculated using a standard interest rate based on the average mortgage rate published by the Bank of England²⁷. The Bank also shapes the mortgage market more widely: it has created rules to limit the riskiest type of mortgage lending, and it tests whether the largest banks can cope with big losses from unsecured debt²⁸. What to do if debt becomes unaffordable is covered in the guide to debt.

For savers, the same mechanism works in reverse. When Bank Rate rises, savings rates tend to follow, though not always by the same amount or at the same speed²⁴. Whether saving actually pays in real terms depends on whether the rate earned beats inflation, which is covered on savings and inflation. Typical rates on cards, overdrafts and loans are on borrowing costs, and average mortgage and savings rates over time are on mortgage averages and savings averages.

Scams using the Bank of England's name

The Bank of England's role in setting rates makes it a name scammers borrow. The Bank states it will never offer savings accounts, investments, cryptoassets or "guaranteed returns", and it will never contact anyone about unclaimed estates, refunds, fines or warrants²⁹. It will never ask anyone to move money "for safety" or to "release funds", never verify identity by requesting National Insurance numbers or bank statements (unless banknotes are being exchanged), never provide investment advice or endorsements, and never contact people from personal email addresses²⁹. Its policy is unambiguous: "The Bank of England and its staff do not endorse, promote or advertise financial products"²⁹.

The scale of the underlying fraud problem is large. Criminals successfully stole £1.3 billion from individuals through banking fraud and scams in 2025, according to industry body UK Finance³⁰. Where authorised push payment scams occur through CHAPS, the payment system the Bank of England itself operates, the maximum level of reimbursement has been set at £85,000 per claim³¹.

The Bank also works on the resilience behind the scenes: when cyber-risk affects one of the roughly 1,500 companies it regulates, it coordinates its response with the Financial Conduct Authority, the Treasury and the National Cyber Security Centre, while individual banks remain responsible for protecting themselves and their customers against cyber-attacks³². How to spot and report scams generally is covered in the guide to scams and fraud, and your rights when things go wrong with a bank are on consumer protection.