The Bank of England is responsible for managing UK monetary policy and maintaining the supply of money in the economy. The Bank of England is independent of the government. Although, the government can appoint members and set the inflation target. However, the Bank has a key role to play in the management of the economy and finance sector.
History of the Bank of England
The Bank was founded in 1694 as a private bank who lent money to the Government to finance the Government’s growing national debt. By the nineteenth century (1844) the Bank of England had become the official Central Bank of the UK.
In 1997, the Bank of England was given independence to set interest rates. This was a role formerly undertaken by the Chancellor of the Exchequer. However, it was feared that the chancellor took decisions for political reasons. Therefore, the Bank was given independence to set interest rates for economic rather than political factors.
Functions of the Bank of England
- Money Supply. The Bank of England is responsible for issuing bank notes and coins. They need to print enough to meet demand, without causing excess inflation.
- Lender of Last Resort. The bank of England is also the lender of last resort. This means that if commercial banks suffer a shortfall of cash then they can always borrow money from the Bank of England. This is an important function has it helps maintain liquidity and confidence in the banking system. This role was tested in 2007 when Northern Rock couldn’t raise enough funds on the money markets and were forced to borrow from the Bank of England with government acting as guarantor.
- Setting Interest Rates. In particular the Bank have an inflation target of CPI 2% +/-1. The Bank produces an inflation forecast and set interest rates according to predictions of future inflation.