BANK OF ENGLAND

The Bank of England, formally the Governor and Company of the Bank of England, is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in operation today.

The Bank of England has two core purposes – monetary stability and financial stability. The Bank is perhaps most visible to the general public through its banknotes and, more recently, its interest rate decisions. The Bank has had a monopoly on the issue of banknotes in England and Wales since the early 20th century. But it is only since 1997 that the Bank has had statutory responsibility for setting the UK’s official interest rate.

Interest rates decisions are taken by the Bank’s Monetary Policy Committee (MPC). The MPC must judge what interest rate is necessary to meet a target for overall inflation in the economy. The inflation target is set each year by the Chancellor of the Exchequer.

The Bank implements its interest rate decisions through its financial market operations – it sets the interest rate at which the Bank lends to banks and other financial institutions. The Bank has close links with financial markets and institutions. This contact informs a great deal of its work, including its financial stability role and the collation and publication of monetary and banking statistics.

The Bank of England is committed to increasing awareness and understanding of its activities and responsibilities, across both general and specialist audiences alike. It produces a large number of regular and ad hoc publications on key aspects of its work and offers a range of educational materials. The Bank offers technical assistance and advice to other central banks through its Centre for Central Banking Studies, and has a museum at its premises in Threadneedle Street in the City of London, open to members of the public free of charge.

Goals

The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%.

Note that the Bank’s target is symmetric, i.e. “Inflation below the target of 2% is judged to be just as bad as inflation above the target”. (quote from the BoE’s website). This contrasts with the ECB (who, technically, have a mandate, not a target), whose ‘target’ is asymmetric.

The inflation measure targeted by the BoE is headline CPI.

Communication with Markets

• Speeches by members of the BoE’s rate-setting Monetary Policy Committee (MPC).
• Interest rate decision announced at noon on the second day of the meeting.
• Minutes (including voting records) are published two weeks after the first day of the meeting. The voting record can have some market impact, more so than both the interest rate decisions (the outcome of which tends to be widely and correctly anticipated) and the minutes.

Meeting Frequency

Once a month, normally on the first Wednesday and Thursday of the month (the rate decision is announced on the second day of the meeting at around noon).

Announcements

• A quarterly inflation report is published, and the Governor presents the report in testimony to parliament. The inflation report can have a market impact.
• A quarterly survey of public attitudes to inflation (i.e. consumer inflation expectations) is published, and can have significant market impact.

Reputation

The BoE is one of the most transparent and predictable of the major CBs, and as such, is highly regarded by the markets.

Structure of Decision-Making Body

The Monetary Policy Committee (MPC) sets interest rates.

This comprises nine members, five from the BoE, and four external members appointed by the Chancellor (i.e. the Treasury Secretary).

Governance

The current governance and accountability framework is set by the 1998 Bank of England Act, which provides for a Court of Directors, a Committee on Non-Executive Directors within Court, and a Monetary Policy Committee.

The Court of Directors

Court consists of the Governor, two Deputy Governors and 16 Directors. The Directors are all non-executive. The Governors are appointed by the Crown for five years and the Directors for three years. Details of the current Court can be found in the Bank’s Annual Report.

Under the Act, the responsibilities of Court are to manage the Bank’s affairs, other than the formulation of monetary policy, which is the responsibility of the Monetary Policy Committee. This includes determining the Bank’s objectives and strategy, and aiming to ensure the effective discharge of the Bank’s functions and the most efficient use of the Bank’s resources.

During the year, Court commissioned an external review of its effectiveness. The purpose of the review was to evaluate how Court functioned and performed as a body, with a view to identifying ways to improve its operation and effectiveness. A series of actions have been agreed that will be taken forward.

The Monetary Policy Committee (MPC)

The Bank of England Act establishes the MPC as a Committee of the Bank, subject to the oversight of NedCo, and sets a framework for its operations. Under the Act, the Bank’s objectives in relation to monetary policy are to maintain price stability and, subject to that, to support the Government’s economic policies, including its objectives for growth and employment. At least once a year, the Government specifies the price stability target and its growth and employment objectives.

The MPC must meet at least monthly; its members comprise the Governor and Deputy Governors, two of the Bank’s Executive Directors and four members appointed by the Chancellor. The MPC’s decisions are announced after each monthly meeting and minutes of their meetings are published two weeks later. The quarterly Inflation Report includes the MPC’s projections of inflation and output.

NedCo

The Act provides for a sub-committee of Court (“NedCo”) consisting of all the non-executive Directors, with a chairman designated by the Chancellor of the Exchequer. The chairman of NedCo is also Deputy Chairman of Court. NedCo has responsibilities for reviewing the Bank’s performance in relation to its objectives and strategy, and monitoring the extent to which the Bank’s financial management objectives are met. NedCo is also responsible for reviewing the procedures of the MPC, and whether the Committee has collected the regional, sectoral and other information necessary for formulating monetary policy.

Other functions of NedCo – in which it is supported by the Audit, Risk and Remuneration Committees – include reviewing the Bank’s internal controls and determining the Governor’s and Deputy Governor’s remuneration and the terms and conditions of service of the four members of the MPC appointed by the Chancellor.

NedCo is required to make a report as part of the Bank’s Annual Report. Since 2004 the normal practice has been for the business of Court to be discussed in an extended meeting of NedCo, with the Executive present. Formal decisions are then taken in Court. NedCo also holds meetings from time to time without the Executive, so that it can fulfil its reviewing role.

Audit Committee

The functions of the Audit Committee are to:

• Assist the Court in meeting its responsibilities for an effective system of financial reporting, internal control and risk management.
• Receive reports from, and review the work of, the internal and external auditors. The Committee also considers and makes recommendations on the appointment of the external auditors, and their fees.
• Review the annual financial statements prior to their submission to Court, including consideration of the appropriateness of the accounting policies and procedures adopted. The Committee reports its conclusions to Court.

The Committee normally meets four times a year.

Management Structure

The executive management of the Bank lies within the Governors and Executive Directors.

Structure

In working towards its core purposes, the Bank is organised into three main operational areas – Monetary Analysis and Statistics, Market Operations and Financial Stability, supported by a Central Services area. This structure was introduced in June 1998 to reflect the Bank’s new responsibilities in the light of the 1998 Bank of England Act. In addition, the Co-ordination Division for Europe is responsible for co-ordinating the Bank’s work on Europe, specifically in relation to the euro. The Centre for Central Banking Studies offers teaching and technical assistance to other Central Banks.

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 part of the website describes and explains each core purpose and some of the work that is undertaken to achieve them. This material adds to that provided on the ‘About the Bank’ main page. Other parts of the website provide more information about each of the Bank’s activities.

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

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%.

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 Services 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 if 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, while the Financial Conduct Authority (FCA) supervises individual banks and other financial organisations including recognised financial exchanges such as the London Stock Exchange.

Memorandum of Understanding

In October 1997, a Memorandum of Understanding between the Bank, Her Majesty’s Treasury and the FCA was agreed. This formalises the allocation of responsibilities for regulation and financial stability in the UK. It makes provisions for the establishment of a high level Standing Committee which meets regularly and provides a forum in which the three organisations can develop a common position on any problems which may emerge.

The Bank’s contribution to the Standing Committee on financial stability issues is informed by the operations of the Bank’s Financial Stability Board – a high-level internal body providing guidance on priorities and the direction of work in the Financial Stability area. The Board is chaired by the Bank’s Deputy Governor for Financial Stability, Sir Andrew Large, and generally meets on a monthly basis.

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, 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.

The Bank’s Strategy

A review of the Bank’s strategy and objectives was conducted between October 2003 and November 2004.

The starting point for the new strategy was the clear ‘vision’ of the Bank’s role contained in the two core purposes, which were agreed in by Court May 2004 and published in last year’s Annual Report. The core purposes put the Bank more fully in line with the legislative changes of 1997-98 – focused on monetary and financial stability, aiming to secure authority and confidence at home and offering intellectual and practical leadership in the international community of central banks. These core purposes provide the criteria by which subsequent strategic decisions have been taken and objectives set.

Objectives were set on an interim basis, and published in last year’s annual report. They were:

• Continued provision of a high standard of support for the MPC.
• Development of a more focused research programme into issues relevant to the MPC.
• Continued work to promote understanding of the MPC’s remit and its processes.
• Development of the Financial Stability work under the new Financial Stability Board.
• Concluding the Bank’s work on small firm finance.
• Relaunching the Bank’s core banking system.
• Delivering a high standard of professionalism across the Banking and Market functions.
• Further development of market intelligence functions.
• Taking forward a market consultation on the conduct of Open Market Operations.
• Continued improvement in the Bank’s Business Continuity arrangements and their integration with financial sector plans.
• Introduction of new approaches to the approval and monitoring of projects, and for setting and monitoring risk standards.
• Continued enhancement, under the new HR Director, of the Bank’s career development and succession planning functions.

The strategic review concluded in November 2004, with the adoption by Court of seven strategic aims; these underpin the strategy from 2005/06 onwards and have also influenced outcomes, as described below, the seven strategic aims are:

1. The Bank should maintain its good track record of meeting the inflation target and contribute to the intellectual development of monetary policy.
2. Money market operations should ensure much less volatility in overnight sterling interest rates and support better liquidity management in the banking system, both day by day and in the event of stressed conditions.
3. The Bank’s banking operations should be efficient and clearly focused on activities necessary to ensure monetary and financial stability.
4. The Bank should have a clear framework for identifying and reducing risks to financial stability affecting the United Kingdom, using its influence to ensure proposed risks mitigates are adopted and drawing on a strengthened market intelligence capability.
5. The Bank should be fully prepared in its management of financial crises and its business continuity planning, within the Standing Committee Framework.
6. The Bank should promote safe and efficient payments and settlement systems and be at the forefront of best practice in operational and policy areas.
7. To enable delivery of these strategic priorities, business standards will be raised across the Bank, particularly in the areas of people management, risk management, project management and performance measurement.