Bank of England (BoE)

What Is the Bank of England (BoE)?

The Bank of England (BoE) is the central bank for the United Kingdom. It has a wide range of responsibilities similar to those of most central banks around the world. It acts as the government’s bank and the lender of last resort. The BoE issues currency and, most importantly, oversees monetary policy.

Understanding the Bank of England (BoE)

Sometimes known as “the Old Lady of Threadneedle Street” in honor of its location since 1734, the BoE is the United Kingdom’s equivalent of the Federal Reserve System in the United States. Its function has evolved since it was established in 1694, and it has been responsible for setting the UK’s official interest rate since 1997.

The BoE was established as a private institution in 1694 with the power to raise money for the government by issuing bonds. The BOE also functioned as a deposit-taking commercial bank. In 1844, the Bank Charter Act gave it, for the first time, a monopoly on issuing banknotes in England and Wales, thus taking a major step toward being a modern central bank.

The gold standard was temporarily abandoned during World War I and fully abandoned in 1931. The BoE was nationalized in 1946 following the conclusion of World War II. In 1997, monetary policy authority was transferred from the government to the BoE and prohibited other banks from issuing their own banknotes, making the BoE politically independent for the first time.

Monetary Policy Committee

Interest rate policy is set by the Monetary Policy Committee (MPC), which has nine members. The MPC is led by the Governor of the Bank of England, a civil service post with the appointment usually going to a career bank employee. The three deputy governors for monetary policy, financial stability, and markets and policy serve on the committee as well as the BoE’s chief economist. The final four members are appointed by the Chancellor of the Exchequer, who is equivalent to the Secretary of the Treasury in the United States.

The MPC meets eight times a year to consider the need to change interest rate policy to achieve the government’s inflation target. Each member of the committee has one vote, and a consensus of opinion is not required. The BoE raises and lowers the bank rate, which is the rate charged to domestic banks.²

When the global financial market crisis hit in October 2008, the bank rate was 5%. It was reduced to 0.5% by March 2009, but the cuts failed to stimulate the economy. The MPC added additional stimulus through the Asset Purchase Facility, a process known as quantitative easing (QE).

Financial Services Act of 2012

After the global financial crisis of 2008, the government adopted new regulatory reforms through the Financial Services Act of 2012. With these measures, the bank created the Financial Policy Committee (an independent committee modeled after the MPC), and a new subsidiary of the bank called the Prudential Regulation Authority. The bank also began to supervise financial market infrastructure providers such as payment systems and central securities depositors.

Brexit

With Britain’s exit from the European Union (although Britain doesn’t use the Euro), known as Brexit, which is short for “British exit,” the BoE has been charged with developing plans to deal with potential economic fallout. Possible developments include inflationary pressure from a collapse of the British pound or a weakening economy that could require interest rate cuts.

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