THE BANK OF ENGLAND – CORE PURPOSES

In pursuing its goal of maintaining a stable and efficient monetary and financial framework as its contribution to a healthy economy, the Bank has two core purposes; achieving them depends on the work of the Bank as whole. This page describes and explains each core purpose and some of the work that is undertaken to achieve them.

The Bank’s Core Purposes are determined by Court as part of its role in setting the Bank’s Objectives and Strategy.

Core Purpose 1 – Monetary Stability

Monetary stability means stable prices and confidence in the currency. Stable prices are defined by the Government’s inflation target, which the Bank seeks to meet through the decisions on interest rates taken by the Monetary Policy Committee, explaining those decisions transparently and implementing them effectively in the money markets.

The first objective of any central bank is to safeguard the value of the currency in terms of what it will purchase at home and in terms of other currencies. Monetary policy is directed to achieving this objective and to providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy operates in the UK mainly through influencing the price of money, in other words the interest rate.

The Bank’s price stability objective is made explicit in the present monetary policy framework. It has two main elements: an annual inflation target set each year by the Government and a commitment to an open and accountable policy-making regime.

Setting monetary policy – deciding on the level of short-term interest rates necessary to meet the Government’s inflation target – is the responsibility of the Bank. In May 1997 the Government gave the Bank operational independence to set monetary policy by deciding the short-term level of interest rates to meet the Government’s stated inflation target – currently 2%.

Core Purpose 2 – Financial Stability

Financial stability entails detecting and reducing threats to the financial system as a whole. Such threats are detected through the Bank’s surveillance and market intelligence functions. They are reduced by strengthening infrastructure, and by financial and other operations, at home and abroad, including, in exceptional circumstances, by acting as the lender of last resort.

In pursuit of both purposes the Bank is open in communicating its views and analysis and works closely with others, including:

• Other central banks and international organisations to improve the international monetary system.
• HM Treasury and the Financial Conduct Authority, under the terms of the 1997 Memorandum of Understanding, to pursue financial stability.

The Bank will also play its part in promoting an open and internationally competitive financial centre in the UK, using its expertise to help make the UK financial system more efficient, where such efforts would be in the public interest and provided that they do not conflict with its primary responsibilities or those of other agencies.

The Bank of England has played a key role in maintaining the stability of the United Kingdom’s financial system for 300 years and it is now a core function of most central banks. A sound and stable financial system is important in its own right and vital to the efficient conduct of monetary policy.

Since 1997, the Bank of England has had responsibility for the stability of the financial system as a whole, while the Financial Conduct Authority (FCA) supervises individual banks and other financial organisations including recognised financial exchanges such as the London Stock Exchange.

Lender of last resort

In exceptional circumstances, as part of its central banking functions, the Bank may act as “lender of last resort” to financial institutions in difficulty, in order to prevent a loss of confidence spreading through the financial system as a whole. This role is set out in the Memorandum to Understanding, which also establishes arrangements for a Standing Committee of the three bodies to ensure effective exchange of information and to co-ordinate the response to a crisis.