Bank Of England

What Is The Bank Of England?

The Bank of England (BoE) serves as the central bank and ultimate national monetary authority of the United Kingdom. It was established in 1694 and is headquartered in London. Its primary function was to act as the British government's banker.

Initially, the BoE was held privately by shareholders. In 1946, it was nationalized. Later, in 1998, it became an independent public organization. This change granted the bank greater operational independence in carrying out its functions. The BoE is responsible for issuing and managing UK's currency (Great Britain pound), maintaining financial stability, and implementing monetary policies.

• The Central Bank of England is the United Kingdom's national financial authority. It began functioning in 1694.
• It has been headquartered in Threadneedle Street, London, since 1734. It is known as the "lender of last resort" and is the "banker's bank" in the UK.
• Initially, it was privately held by stockholders who provided credit in exchange for government bonds. However, it remained privately owned until 1946, when it was nationalized and became a public organization.
• It aims to maintain inflation at a target rate of 2% and implements monetary policies to achieve this goal.

Bank Of England Explained

The Bank of England (BoE) is recognized as one of the world's most ancient modern banking institutions. It originated from the necessity of financing the country's war efforts and gradually diversified its operations to encompass sectors such as industry, agriculture, and government. It has the primary duties of any central bank and oversees the monetary and financial situation of the economy.

Andrew Bailey, the Bank of England governor, leads the prestigious institution and guides its strategic direction as the highest-ranking executive. BoE, also known as the Bank of Banks, controls and supervises the country's lending, borrowing, and daily operations of other banking institutions. Over three centuries, the bank's ownership shifted from private to public. The bank has also seen a series of centralization and decentralization of its functions.

The Bank of England base rate, commonly called the Bank Rate or official interest rate, represents the interest rate at which the BoE provides loans to commercial banks and financial institutions operating within the United Kingdom. It serves as a fundamental tool for influencing interest rates throughout the economy. Changes in the base rate directly impact borrowing costs for individuals, businesses, and financial institutions. The Bank of England's interest rates are pivotal in shaping the UK's monetary policy and influencing borrowing costs for individuals and businesses.

The BoE has played an active role in maintaining financial stability and resilience during the financial crisis of 2008, Brexit, and countless other economic fluctuations. One of the most significant attacks the bank faced was Black Wednesday. Investors and speculators led by George Soros forced the bank to withdraw the GBP from the European exchange rate mechanism.

History

The BoE was established on July 27, 1694, through the Tonnage Act and the granting of a royal charter. Its creation was a response to Britain's war with France, and it was granted exclusive access to government accounts. Individuals who subscribed to the bank were issued bonds in exchange for credit to finance the war.

The bank raised £1.2 million in 12 days at 8% p.a. This amount helped fund the war, primarily through newly built naval fleets. The additional funds were also used to develop industry and agriculture.

John Houblon served as the first Governor of the BoE, which initially operated from Mercers' Hall before moving to Grocers' Hall in 1694. Finally, in 1734, the bank relocated to Threadneedle Street.

In 1772, the bank faced the first modern banking crisis to the extent that London was declared bankrupt. In 1825-26, gold was supplied to the bank for the first time. In 1844, the BoE became the sole currency-issuing authority through the Bank Charter Act. The power was also held by seven other banks before. Further, the bank became the lender of last resort in 1866.

In the 20th century, the bank employed Keynesian economics to monitor and control the economy, especially inflation, aggregate demand, interest rates, and money supply. In 1993, the bank published its first Inflation Report, still one of its most popular reports.

Functions

Here are the functions of BoE in the British economy.

1. Monetary stability is one of the bank's prime concerns. The bank achieves this by maintaining stable prices and instilling confidence in the currency.
2. The BoE has a monopoly in printing and issuing the Great Britain pound in the UK. It also oversees payments made using the GBP using debit/credit cards and digital payment systems.
3. Managing inflation through base interest rates is another essential function of any central bank. The monetary planning committee of BoE is responsible for setting official interest rates and controlling inflation.
4. The BoE is the government's banker facilitating national transactions and managing government accounts. The bank also holds the country's gold and forex reserves.
5. BoE is the lender of last resort in the United Kingdom. It supports other private and public banks from going into bankruptcy and protects their clients.
6. The financial planning committee regulates and supervises other banks and insurance companies in the UK.
7. It manages liquidity in the market through its asset purchase facility from funds raised through the issue of government bonds and cash from the debt management office.

Criticisms

As the central bank controls a country's financial activities, it is no surprise that the BoE should invite any criticisms. Whenever there is an economic or financial issue, the public feels the bank could've done more to control the problem —for instance, the 2008 financial crisis and Black Wednesday.

While the bank is subject to constant attacks, here is a list of recent criticisms:

• August 2022: The bank was accused of being too slow to respond to economic repercussions, especially inflation. The bank was alarmingly lethargic in raising interest rates.
• October 2022: Britain's pension funds struggled to meet their margin calls. The bank decided to reduce taxes and borrow, raising the bond yields.
• December 2022: The bank's high-interest rates have led to a loss of jobs and businesses in the country. It couldn't control inflation. The then inflation of 10.7% was five times higher than the bank's target of 2%.
• February 2023: The bank was accused of exacerbating the country's economic situation. Critics claimed that the bank's inflation forecasts were inaccurate and its policy decisions were wrong.
• May 2023: Critics blamed the bank for facilitating waste and fraud when it absorbed 340 million pounds of government debt to support the government in the first year of the pandemic.

Bank Of England vs Federal Reserve

The Federal Reserve (Fed) is the central bank of the United States. It is the American counterpart of the BoE. Consider the following differences between the two banks:

BoE	Fed
Central Bank of the United Kingdom.	Central Bank of the United States.
It was established in 1694.	Established in 1913.
It controls the GBP.	It handles the USD.
It follows a single mandate of price stability.	It pursues a dual mandate of price stability and unemployment.
Nationalized bank.	Owned by district banks, still public.
Member banks do not approach directly.	Member banks can approach directly.

Despite the differences, the two banks are similar in issuing notes, controlling inflation, maintaining monetary stability, and supervising private and public banks.

Frequently Asked Questions (FAQs)

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