You might have noticed that the Chip Cash ISA has a rate that tracks the Bank of England base rate.
Here we explain what the base rate is, what tracker rates are and how they work with the Chip Cash ISA.
Bank of England (BoE) Base Rate
Often simply referred to as the base rate, is the interest rate at which the BoE lends money to commercial banks.
It serves as a benchmark for all other interest rates in the economy, influencing the rates at which banks offer for their lending and savings products.
How and when the base rate changes
The Monetary Policy Committee (MPC), a group within the Bank of England, sets the base rate based on economic conditions, inflation targets, and other factors.
You can find a timetable of all MPC meeting dates on the BoE website, but these meetings are usually widely reported on the media, with the results usually shared instantly by the major news outlets, and MPC meeting notes are a matter of public record.
The main aim of changing the base rate is to control inflation. If inflation is rising above the target set by the government, the BoE may raise the base rate to make borrowing more expensive and encourage more saving. But if the economy is slow and inflation is below the target, the base rate may be lowered to encourage borrowing, spending, and investment.
Tracker interest rates in theory
First thing to cover is that there are three main types of interest rates for savings and loans; variable, fixed and tracker.
Variable rates can be changed at any time at a financial institution’s discretion and fixed rates are contractually set for a defined period of time.
Tracker rates are directly linked to the Bank of England base rate at a predefined margin, and are common with mortgages and savings accounts.
For example if a product has a tracker rate that is “BoE base rate minus 1%”, it’ll always be 1% under whatever the base rate is.
So, if the base rate is 5%, the tracker rate will be 4%. But if the base rate increases to 5.5%, the tracker rate will pay 4.5%, and should the base rate reduce to 4.5% the tracker rate will pay 3.5%.
A rate that moves with the Bank of England
One advantage of tracker rates is that your rate will reflect wider market conditions, and you can effortlessly ensure that you're getting a competitive rate.
This is because, as explained above, the BoE base rate influences all other rates in the UK and when the base rate moves it’s likely other variable rates will too.
Tracker rates at Chip
The Chip Cash ISA has a gross rate rate that tracks the BoE base rate minus 0.26%.
At the time of writing, the base rate is 5.25%, therefore the gross rate on the Chip Cash ISA is 4.99%.
As we show all rates using AER (see below), the rate you will see on the account will be slightly higher at 5.10% AER, as AER reflects the effects of compounding.
Gross rate vs AER
AER is the rate of interest you earn on any balance above £0. It stands for Annual Equivalent Rate and shows the interest rate for a year, and reflects compounding (earning interest on interest), taking into account any interest payments made to you during the year.
With a 5.10% AER interest rate, if you put in £1,000 on your first day, you'd earn £51.00 in interest over the year. If nothing changes (including the interest rate), you'd have £1,051.00 at the end of the year.
AER enables you to compare the interest rates on accounts from different banks and building societies where interest may be calculated or paid at different frequencies.
Gross interest is the rate you’ll earn before compounding is reflected. UK bank interest is paid gross. For example if AER is 5.10%, the gross interest rate is 4.99%.