The Bank of England is the central bank of the entire United Kingdom. Most large modern central banks are modelled after the Bank of England. Completely owned by the British Government as an independent public organisation since 1997, the bank has full autonomy in setting monetary policy. It also has full control over the issuing of banknotes in England and Wales, but not in Scotland,Northern Ireland, the Channel Islands or the Isle of Man.
The bank, which is also known as the ‘Old Lady of Threadneedle Street,’ was established in 1694 and nationalised on1 March 1946. Its responsibilities have evolved over its three-hundred-year history, and financial stability and monetary stability are now its two core purposes. Since 1997 one of its statutory duties is setting theUK’s official interest rate. Interest rate resolutions are made by the bank’s Monetary Policy Committee.
In order for monetary stability to exist, an economy must have low inflation rates and a strong currency that people have confidence in. The government has an inflation target, which outlines what stable prices are considered to be. The bank strives to meet the government targets through the decisions that the Monetary Policy Committee decisions takes.
The bank’s other core function is financial stability, a key ingredient for a healthy and successful economy. It carries out this function through evaluation and reduction of risk, market intelligence, payments system oversight, banking and market operations, including, in exceptional circumstances, acting as a lender of last resort, and resolution work to take care of troubled banks.
At times the bank has to intervene in order to spur investment and economic growth. For example, in June 2012 it announced that it was giving six-month loans at super-low interest rates if the banks would in turn agree to lend to more businesses. The money thus freed up for lending was expected to run into billions of pounds. According to the Financial Policy Committee, commercial banks had a lot of cash reserves for short-term market upsets, and they could use these for lending. The committee added that less should be paid in dividends and bonuses in an effort to boost long-term capital buffers.
The committee was worried enough about weak lending in the Knot suspend the regulations governing how much banks must hold in cash and other liquid assets to get credit flowing again. Bank of England has been taking radical steps to revive growth in the UK. In addition to the “funding for lending” scheme for banks and relaxing the liquidity regulations, the bank also infused £50 billion of stimulus into the economy through quantitative easing, which involves purchasing government bonds to increase available capital.
This economic stimulus came at a time when the UK had a double-dip recession, and the move was designed to jolt the country towards recovery. Interest rates remained at a record low of 0.5 percent, since quantitative easing is usually a move effective way to lift the economy. The £50 billion was in addition to £325 billion previously pumped into the economy by the Bank of England over the last several years.