Monetary policy of Bank of England

Bank of England-Background

The central bank of the UK founded in 1694 by a group of private bankers, chiefly to raise money for the Crown, it was chartered first to operate as a commercial joint-stock bank (commercial banks). In succeeding centuries its royal charter favoured the circulation of its notes, and it became a leading banker to other banks. The Bank Charter Act 1844 recognized it as the central note-issuing authority and the Mender of last resort. By 1870, it was recognized as responsible for the general level of interest rates, which it regulated through the bank rate, and thus for the general state of credit in the country. By the early twentieth century the bank was recognized as the central organ for the execution of national financial and monetary policy, under the overall direction of the government. In 1946, the bank was nationalized, thus completing its identification with the State (Capie, pp.54).

The Banking Act 1979 provided formal definitions under which the bank exercised its supervision of commercial banking practices. The bank acts as a banker for the commercial banks, transactions between which (outside the clearing-house system) are settled between accounts held at the bank. The bank also supplies funds (by buying securities) to the commercial banks to enable them to balance their books at the end of the day. By setting the rate of interest for these operations, the bank can influence the whole pattern of interest rates.

The Bank of England Act 1998 conferred sole responsibility to the bank for determining UK interest rates, a function until then exercised by the Treasury (Monetary Policy Committee). Since 1997, the bank has had statutory responsibility for the effectiveness and stability of the financial system as a whole (systemic risk), while the Financial Services Authority (Financial Services and Markets Act) now supervises the individual banks and building societies for prudential risk (capital adequacy) (Fforde, Pp.96).

The bank no longer manages the government debt issue (national debt) but engages in gilt repos as part of daily market operations (gilt stripping). Securities eligible for use by the bank's counterparties (counterparty risk) as collateral security for lending include gilt-edged securities, sterling treasury bills, eligible bank bills (bills of exchange) and euro-denominated securities (European Monetary Union) issued by the European Economic Area (European Free Trade Association), central governments and major international institutions where eligible for use in European Central Bank operations. Since June 1998, the bank has been organized in three operational areas:

Monetary analysis and statistics;

Financial market operations, and

Financial stability and central services

Discussion

The central bank of the UK acts as banker to the government and the banking system and acts as the authority responsible for implementing monetary policy. The Bank of England handles the government's financial accounts in conjunction with the treasury, taking in receipts from taxation and the sale of government assets, and making disbursements to the various government departments to fund their activities. The bank acts as the government's broker in its borrowing and lending operations, issuing and dealing in government bonds and treasury bills to underpin its year-to-year budgetary position and management of the country's national debt.

Commercial banks hold accounts with the Bank of England and, in its ...