The Function of the Bank of England
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1. It issues notes and coins. The Bank of England is the sole issuer of notes
and coins in the UK. In theory you could take a £10 note to the Bank of England
and ask for you equivalent sum of Gold. I don't know whether they would take
kindly to such requests but in theory that is how they maintain confidence in
notes and coins as a medium of exchange
2. Managing the government’s debt. National Debt in the UK At the end of
2005/6 general government debt was £529.1 billion, equivalent to 42.1 per cent
of GDP. [1] To manage the government debt the bank of England sell bonds and
gilts to the private sector. Usually bonds have a lifetime of about 30 years. In
order to encourage people to buy government debt they need to offer an
attractive interest rate. Interest payments on UK debt amount to nearly £30
billion a year
3. Managing Monetary Policy. In particular the MPC Monetary Policy Committee
is responsible for changing interest rates in order to keep inflation within the
governments target of CPI 2% +/-1. To achieve this inflation target the MPC meet
every month and examine future inflation trends. If inflation looks to be
increasing then they will vote to increase interest rates in order to dampen
demand. They don't directly set mortgage rates but indirectly they do influence
mortgages through the setting of interest rates.
4. The Bank of England actually set the base rate of “repo” rate. This is a
rate at which they lend to the commercial banks. They keep the banks short of
liquidity so that they often have to borrow on this repo rate. If this repo rate
changes then the commercial banks usually pass the changes on to their customers
by changing there own interest rates.
5.. Acting as lender of last resort. If the commercial banks are short of
cash then they go to the Bank of England who will be able and willing to lend
them money. This is important for the banking system because it ensures the
banks are never short of cash and so people have confidence in the banking
system.
6. The Bank of England oversees the banking and financial system of the UK
[1] http://www.statistics.gov.uk/cci/nugget.asp?id=277
About the Author
R.Pettinger is an Economics teacher at Oxford and writes frequently on the UK
economy and mortgages. He edits a site about Mortgages including a guide to
different types of mortgages.
http://www.mortgageguideuk.co.uk/
Follow us @Scopulus_News
Article Published/Sorted/Amended on Scopulus 2007-03-25 19:57:03 in Economic Articles
