Issue 151

A Crash Course in... The Bank of England

29th January 2007

The Bank of England is the central bank of the United Kingdom, and its main function is to set the monetary policy for the entire country. The Bank's main building is situated in the City of London, on Threadneedle Street. The current Governor of the Bank is Mervyn King, who took the role on June 30 2003.

The Bank has a series of functions. At a basic level, it holds a monopoly on the production of currency in Britain, producing all notes and coins. It acts as the Government's banker, maintaining the Consolidated Fund account, the main bank account of the Government established in 1787 by Prime Minister William Pitt the Younger.

The Bank also manages the UK's foreign exchange and gold reserves.

A major public function of the Bank of England is to maintain monetary stability. To ensure this stability, the bank must guarantee stable prices and confidence in the Sterling currency. Prices must be kept within the Government's inflation target, currently set at 2%. The rate of inflation is currently 3%.

To maintain the inflation rate, the Bank has various tools at it's disposal, the most important being the ability to adjust the base inflation rate. This rate is currently 5.25%. Following Black Wednesday in 1992, the base rate spiked to 15%. Higher base rate mean higher mortgage costs, but benefits savers, as their respective rates are based on this figure.

Before 1997, the base interest rate was determined by the Government directly. When he became Chancellor of the Exchequer, Gordon Brown removed this control from Government. The rate is now set by the Monetary Policy Committee.

The Bank of England is also responsible for maintaining financial stability. This requires protecting the country against threats to the entire financial system. These threats are monitored by various surveillance and market intelligence functions. Such threats are dealt with through financial operations, and the bank may act as a lender of last resort if no other institution is able to offer credit. In order to complete these functions, the Bank of England works with HM Treasury, the Financial Services Authority and various Foreign Central Banks and international institutions.

Tim Sculthorpe