The Bank of England is the central bank that makes monetary policy maintain price decisions for the United Kingdom. Its primary objective is to e stability.

The Bank of England (also known as the BoE) is the central bank for the United Kingdom of Great Britain and Northern Ireland (i.e. the UK). It has the power to set monetary policy for the UK.

The powers of the Bank of England

  • Decides on monetary policy – the Monetary Policy Committee decides upon the appropriate interest rate for the UK.
  • Issues currency
  • Acts as a regulator for financial institutions and the financial system
  • Acts as the lender of last resort (which helps to ensure financial stability during times of financial crisis)

A brief history of the Bank of England 

  • 1694 – The bank is set up as a private bank in 1694 to be a commercial lender but also to raise funds for the government. 
  • 1734 – The bank moves to its current location on Threadneedle Street. This is where it earns the nickname “The Old Lady of Threadneedle Street”.
  • 1844 – The Bank Charter Act 1844 formalises (and gives exclusivity to) the issuance of banknotes by the Bank of England. 
  • 1946 – The BoE is nationalised and is now owned by the UK Government. The Government has the power to appoint the Governor of the Bank of England.
  • 1997 – The Bank of England is given independence in its decision-making on setting monetary policy. (Before this, the UK Chancellor of the Exchequer would set the interest rate policy.)

The BoE’s mandate

The Bank of England’s monetary policy objective is:

“to maintain price stability in the UK”

The UK Government decides upon the inflation target (as of 2022 the target for inflation is 2%). 

The Bank of England then uses monetary policy to best achieve this target. If inflation is more than +/-1% on either side of the inflation target then the Governor of the Bank of England is mandated to write a letter to the Chancellor of the Exchequer (the UK finance minister) to explain why the target has been missed.

The Monetary Policy Committee

The Monetary Policy Committee (MPC) is a nine-member committee that decides on monetary policy. The MPC meets 8 times per year. The MPC is comprised of:

  • The Governor  – who chairs the meeting
  • 3 Deputy Governors – for monetary policy, financial stability and markets and policy
  • The BoE Chief Economist
  • 4 external members – appointed by the Chancellor of the Exchequer

The MPC decides on the appropriate monetary policy by voting to:

  • Adjust interest rates – a conventional tool of monetary policy. The “Base Rate” can be raised to combat higher inflation or lowered to increase low inflation.
  • Adjust asset purchases – an unconventional tool that has been used when interest rates have been cut to zero.

Market impact

Monetary policy changes can have a significant impact on UK Government bond (Gilt) yields and the outlook for the British pound (GBP). 

N.B. As with all central banks, we look out for communications from BoE members (especially the Governor) that might hint at potential decisions in upcoming meetings. GBP will especially react.

BoE decisionLikely Market Reaction
Tighter than expected monetary policyUK Gilt yields move higherGBP strengthensUK equities may fall (although banks may rally)
Looser than expected monetary policyUK Gilt yields move lowerGBP weakensUK equities may rally (although banks may fall)

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. All trading carries risk.