What is the Bank of England?

Founded in 1694, the Bank of England (BoE) is the central bank of the United Kingdom. One of the oldest banks in existence, it was originally owned by shareholders before being nationalised in 1946. It’s now an independent body, owned by the Treasury Solicitor on behalf of the government.

With a mandate to support the sitting government's economic policy, the Bank also ensures fiscal stability through the Monetary Policy Committee (MPC).

The BoE also set up the Financial Policy Committee in the wake of the financial crisis to act as a regulator, aiming to reduce risk in the UK financial sector.

The Governor sits at the top. They’re the chair of the MPC and responsible for the day-to-day running of the Bank. They’re appointed by the Monarch on the recommendation of the Chancellor of the Exchequer and the Prime Minister.

Underneath the Governor sits several deputy governors or department chiefs, responsible for different departments including Markets and Banking, Monetary Policy, Financial Stability, Prudential Regulation and Operations.

What does the Bank of England do?

1. Currency

   The bank stopped being a traditional bank in 2016. But one of the few public services the bank still offers is the exchange of bank notes.

   A key role of the bank is the issuing of currency, and it’s one of only eight banks able to do so. It’s got sole issuing rights for England and Wales but, several other banks have the rights for Scotland and Northern Ireland. But it still oversees the notes that these banks issue to make sure they comply with asset-backing rules.

2. Processing card payments

   The Bank also processes card payments. When you pay by card in a shop, your money goes on a journey from your bank account to the shop’s. But not in a straight line.

   After you’ve tapped your card, the shop sends your data to your card provider. Those details then go to the card intermediary like Visa or Mastercard. From there an authorisation is requested by the intermediary from your bank. Once authorised, a message goes to the shop’s card machine, and you can leave with your item.

   The BoE comes in after this, reconciling all payments from the card reader with Visa, Mastercard and other banks. The payment then leaves your bank and arrives with the shop’s bank. That’s why there’s a delay on money leaving your account when paying by card.

3. Gold custodian

   The BoE is the custodian of the UK’s gold reserves as well as for other central banks. There are roughly 400,000 gold bars stored within their vaults.

4. Monetary Policy

   The biggest role the Bank has is setting monetary policy. This is what you’ll see and feel most in day-to-day life. The Bank has operational independence from the Government and sets interest rates or follows quantitative easing methods. The BoE raised interest rates 14 consecutive times across 2022 and 2023 to combat high inflation.

What is the Monetary Policy Committee (MPC)?

The MPC’s job is to keep inflation low and stable around the target 2%. They tend to try and do this through increasing or cutting interest rates. This either makes it more expensive to borrow money and therefore slow rising prices, or encourages spending to stimulate growth.

There are nine members of the MPC, five employees of the Bank and four external members who are subject matter experts. The Bank’s five members are the Governor, Chief Economist and the three Deputy Governors. Like the Governor, the Deputy Governors are appointed by the Monarch with recommendations from the Prime Minister and Chancellor. But, the Governor appoints the Chief Economist with the Chancellor’s approval. The Chancellor meanwhile appoints the four external members for fixed terms.

The MPC meets every six weeks where it takes all the data and analysis from the Bank’s other departments and goes through several pre-meetings. The first pre-meeting goes over the economic situation and how it has changed since the last public announcement. The second lets all MPC members voice their opinions and assessments of the current economic situation.

The final meeting is the announcement meeting where the members will vote on a motion of what monetary action to take, including the raising, maintaining, or reducing of the UK’s interest rate. This is proposed by the Governor based on what they think the majority will support.

The decision is then announced publicly, and the new monetary policy is put into place immediately. The Government has a target of keeping inflation at 2%, and the Bank’s monetary policy decisions are made with this in mind. This means during sticky high inflation periods, interest rates will likely rise sharply, like in 2023, to try and reduce inflation back towards this 2% target. Of course, there are no guarantees that this is the action that’s taken.