Interest rates, recession and more… a guide to common financial jargon

This can be confusing, as when people talk about ‘interest rates’, they’re not always referring to the same thing as there are different types of interest rates.  

Most commonly, ‘the interest rate’ is employed as a shorthand to refer to the ‘Bank rate’, which influences other kinds of interest rates you see on mortgages or savings accounts. This is also sometimes referred to as the ‘Bank of England base rate’

However, the term ‘interest rate’ is also used in a lot of different contexts. In terms of savings accounts, the ‘interest rate’ would refer to the percentage of your savings that are added to your account. When referring to mortgage ‘interest rates’, it means the amount of money you’re charged when you buy a property.

To find out more, see our beginner’s guide to mortgage rates or our handy jargon buster.

You’ll often hear about the Bank of England as it has a big role in the management of the UK’s economy and finance sector. The Bank of England is independent of the Government and, in its own words, “works to ensure low inflation, trust in banknotes and a stable financial system”. A big part of this is to set the bank rate, the key interest rate in the UK which influences many other interest rates. 

To find out more, see the Bank of England’s guide to what it does.

Inflation is all about rising prices. You often hear about the ‘rate of inflation’, which is how quickly prices go up. So, it’s something you experience all the time, like when you go to the supermarket and find out a tub of butter is suddenly more expensive. Overall, higher inflation means an increase in the cost of living; the so-called ‘squeeze’ on finances. 

For most of the last 20 years, inflation has been around 2%, which is the target rate the Bank of England aims for. Right now, it’s 10.1%. 

This guide provides more in-depth information on understanding inflation. 

Mortgage interest rates, or just ‘mortgage rates’, are the rate of interest charged on your mortgage. The higher the rate, the higher your monthly repayments.

The main types of mortgage rates are ‘fixed’ and ‘variable’. A ‘fixed mortgage’ means the interest you’re charged stays the same for a set amount of time, typically between two to five years. A ‘variable’ mortgage means the interest rate you’re charged can change, this may change as a result of changes to the Bank of England base rate or in response to changes in competitor rates. This can make your mortgage a lot more expensive when their rates are high.

See our beginner’s guide to mortgage rates.

Our economy is made up of all the people and businesses in the UK making and trading things. Businesses employ people, make things, and provide services; people buy and use those products and services; and in the meantime, the government collects taxes and provides public services. These activities all form the economy. And economics is used to describe how this happens. 

A recession occurs when the economy is in decline for two consecutive quarters (six months). The value of all goods and services a country produces (the GDP) decreases. 

Each year the Chancellor of the Exchequer - the government minister in charge of finances - makes a speech about the state of the UK economy and the Government's proposals for changes to taxation. Sometimes, if there is a financial crisis or change of government or leadership, then an additional budget might be held, dubbed an ‘emergency budget’, or ‘mini budget’, as we saw in September 2022.

The financial markets, or just ‘markets’, is a broad term for the marketplaces where shares, bonds, currencies and other financial ‘assets’ are bought and sold. Major political or budgetary decisions can impact the ‘markets’, and the change in prices in the markets can filter down to you, affecting things like pension savings or mortgage rates.

A bond is a loan. The government borrows money by selling bonds to the likes of pension funds and insurance companies. Since it is a loan, the government has to eventually pay this money back, with interest. 

Fiscal policy refers to the economic decisions the government makes. As well as spending money on the likes of education, healthcare and defence systems, they also collect money through taxes and borrow money from financial markets. Chancellors use this term a lot, especially during the budget.

Monetary policy and fiscal policy are a double act when it comes to managing the economy and public finances. Monetary policy is action to influence how much money is in the economy and how much it costs to borrow. In the UK, the Bank of England sets monetary policy, mainly through controlling the bank rate.

The housing market refers to the searching, buying and selling of homes – flats, houses and other dwellings. Some buyers are in it for a home; others are looking to make money from an investment in property. 

Supply and demand is central to economics. In the UK housing market, there aren’t enough homes available to buy (the supply) for the number of buyers (demand). This is at the heart of the many years of rising house prices in the UK.