The Bank of England
The Bank of England was founded in 1694 and nationalised in 1948. It was made independent in 1997, and has a number of roles, including:
Deciding interest rates
In order to keep UK inflation at a specific rate of 2% (+/- 1%), the Bank of England has sole responsibility for deciding the level of base interest rates. The Bank produces its own statistics and undertakes detailed monetary analysis to help it create financial stability.
The actual rate that is manipulated is the repo rate, which is short for repurchase agreement rate, is the rate at which the Bank of England buys back securities it has previously sold in the money markets. The money markets include banks, building societies, and specialist securities dealers. Altering the repo rate affects short-term liquidity in the monetary system, which eventually has an effect on all other rates.
Overseeing the money supply
The Bank of England oversees the supply of money in the economy to ensure that there is just sufficient liquidity in the economy.
Managing foreign reserves
The Bank of England also manages the UK foreign exchange reserves to ensure that the country settles its international debts.
Providing banking facilities
The Bank also provides banking facilities to the high street banks, and all credit banks in the UK must keep an account with the Bank of England. The Bank also provides facilities to the UK government, which keeps its accounts with the Bank.
Regulating the UK banking system
An increasingly controversial feature of the Bank of England’s role is the regulation of the UK banking system. The current regulatory structure in the UK involves three separate organisations, the Bank of England, the UK Treasury, and the Financial Service Authority (FSA). However, the recent banking crisis has raised serious questions about the effectiveness of banking regulation, and the role of the Bank in this process.
Lender of last resort
The Bank also acts as lender of last resort, which means that, given a liquidity shortage in the banking system the Bank of England will provide funds ‘as a last resort’.
Issuing notes and coins
Finally, the Bank is responsible for controlling the issue of new notes and coins.