What is the Bank of England and why does it change interest rates?

In an effort to maintain price control, the Bank of England raised its main interest rate from 4.25 percent to 4.5 percent in May.

It marked the 12th increase in a row since November 2021.

What is the Bank of England?

The Bank of England is the central bank of the United Kingdom and the model upon which most modern central banks are based. Established in 1694, it is the second oldest central bank in the world (after Sweden’s Sveriges Riksbank) and has played a significant role in the British economy for centuries.

The Bank of England’s primary objective is to maintain price stability and contribute to the stability and integrity of the financial system. It is responsible for issuing and managing the country’s currency, the British pound sterling (GBP), and implementing monetary policy to control inflation and promote economic growth.

The Bank of England operates as both a monetary authority and a regulatory authority. As a monetary authority, it sets the benchmark interest rate (known as the “Bank Rate”) and manages the money supply through various mechanisms. It also acts as the government’s banker and lender of last resort, providing financial services to the government and commercial banks.

In its regulatory capacity, the Bank of England oversees the stability and resilience of the UK’s financial system. It supervises and regulates banks, insurance companies, and other financial institutions to ensure they operate safely and soundly. It also plays a crucial role in maintaining financial stability by identifying and managing risks to the system.

The Bank of England is governed by a Court of Directors, headed by a Governor and a Deputy Governor, who are appointed by the British monarch. The Governor also serves as the Chairman of the Monetary Policy Committee, which is responsible for setting interest rates and implementing monetary policy decisions.

Why does the Bank of England change interest rates?

The official measure of how quickly prices are rising is inflation, and the Bank wants to maintain it at 2%.

Although the headline CPI inflation rate has returned to its peak of 11.1% in October 2022, it was still more than four times the target rate in May 2023 at 8.7%.

However, “core” inflation, which does not include the costs of food, energy, alcoholic beverages, or tobacco, increased to 7.1% in May, up from 6.8% in April and the highest level since 1992.

In the past, the Bank of England has increased the official interest rate for the UK in response to rising inflation.

High-street banks’ saving and borrowing rates for individuals and businesses are affected by this.

The Bank of Japan raised interest rates in May for the 12th time in a row, bringing them up to 4.5 percent—their highest level in nearly 15 years.

People may be less likely to borrow money and more likely to save when interest rates rise.

Theoretically, this means that they won’t buy as much, especially if they have to pay more for things like mortgages, which should help keep prices from rising as quickly.

Additionally, it makes it harder for businesses to borrow money and grow.

On the other hand, borrowing money becomes less expensive if the Bank reduces interest rates.

The economy could benefit from this by encouraging people to spend more and businesses to borrow money.

How does the Bank of England change interest rates?

Rates are set by the Bank’s Monetary Policy Committee (MPC), which meets eight times per year.

The nine members of the committee vote at noon on whether to raise, lower, or maintain interest rates following a series of preliminary meetings.

The meeting’s minutes, where the decision was made, are also published.

The Bank also publishes a Monetary Policy Report four times a year. This report details the economic analysis and inflation projections that the MPC uses to decide on interest rates.

What else does the Bank do?

Government bonds are also bought and sold by the Bank of England.

The government uses bonds, which are sort of like an “I owe you,” to raise money to help it meet its spending commitments.

Between the financial crisis of 2009 and 2021, the Bank of England purchased £875 billion worth of government bonds. This was accomplished through a procedure known as quantitative easing, which was intended to lower interest rates, encourage spending, and lower the overall costs of borrowing money from the government.

In addition, the Bank announced an emergency bond-buying program to try to stabilize the economy following financial market turmoil caused by the mini-budget in September 2022.

The Bank said that once that intervention was over, it would proceed with a plan to sell some of the government bonds it holds, which it first announced in August 2022.

What are the Bank’s other responsibilities?

Also, the bank:

produces banknotes, oversees credit and debit card payments, regulates banks and building societies, and acts to reduce risks in the UK financial system by lending to banks when they need it. Together with the Treasury and the financial regulator, the Financial Conduct Authority, it stores the UK’s and other central banks’ gold reserves, which total 400,000 bars and are worth more than £200 billion.

Who is in charge of the Bank of England?

After working at the Bank for more than 30 years, Andrew Bailey assumed the role of governor in 2019.

From January 2004 to April 2011, when he was the bank’s chief cashier, his signature was on billions of UK banknotes.

In addition to overseeing the Bank’s main responsibilities, the governor also chairs three crucial committees that assist the Bank in achieving its goals: the Prudential Regulation Authority, the Financial Policy Committee, and the Monetary Policy Committee.