Bank of England (BoE): Role in Monetary Policy

What Is the Bank of England (BoE)?

The Bank of England (BoE) is the central bank of the United Kingdom. The BoE oversees the nation's monetary policy and issues its currency. It also regulates banks, financial institutions, and payment systems. It is the U.K. equivalent of the Federal Reserve in the U.S.

Like the central banks of other nations, the BoE may act as a lender of last resort in a financial crisis.

Understanding the Bank of England (BoE)

The Bank of England has been nicknamed "the Old Lady of Threadneedle Street" since 1734 when it located its headquarters in that street in London's financial district, The City.

Established in 1694 as a private bank to raise funds for the government, the BoE also functioned as a deposit-taking commercial bank. In 1844, the Bank Charter Act gave it a monopoly on issuing banknotes in England and Wales.

The U.K. government nationalized the BoE in 1946 following the conclusion of World War II.

The BoE has been responsible for setting the UK's benchmark interest rate since 1997, when the government transferred its authority over U.K. monetary policy to the bank. The change was formalized the next year by the Bank of England Act.

Monetary Policy Committee

The BoE's Monetary Policy Committee (MPC) pursues its primary mandate of price stability by targeting an annual inflation rate determined by the government to be most consistent with that objective.

The government's inflation target since June 2022 has been 2%. If the inflation rate deviates from the target by more than 1%, the BoE is required to provide a public explanation to the government on a quarterly basis, including the actions it is taking to return inflation to the targeted rate.

The nine-member MPC is led by the governor of the Bank of England, equivalent to the Federal Reserve chair. Three deputy governors for monetary policy, financial stability, and markets and policy also serve on the committee alongside the BoE's chief economist. The other four members are appointed by the chancellor of the exchequer, equivalent to the Treasury secretary in the U.S.

The BoE's primary monetary policy tool is the Bank Rate, the interest rate it pays on reserve deposits to domestic banks.

The BoE has also provided economic stimulus through asset purchases, a policy known as quantitative easing (QE).

The MPC sets monetary policy eight times a year by majority rule, with each member of the committee casting one vote. The MPC holds four meetings before each policy announcement.

Financial Services Act of 2012

After the global financial crisis of 2008, the U.K. government reformed financial regulation in the Financial Services Act of 2012. The BoE was restored to its role of regulating banks, as it did before 1997.

The act created an independent Financial Policy Committee 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

Following a 2016 referendum narrowly favoring the U.K.'s withdrawal from the European Union (EU), widely known as Brexit, the BoE was charged with assessing the economic fallout. Ahead of the U.K.'s formal departure from the union at the end of 2020, the BoE warned the withdrawal process had increased uncertainty in the financial world and in the public at large.

The Bottom Line

The Bank of England was established as a private company with the British government as its primary client. In fact, it was owned by its shareholders until after World War II, when it was nationalized.

Today's Bank of England is a government-owned entity that acts in the public interest. Recently, that has meant struggling to control the United Kingdom's inflation rate.