The Bank of England is the esteemed and remarkably ancient central bank of the United Kingdom. Established in 1694, this pioneering central bank was created to enhance the welfare of the UK’s citizens by maintaining both monetary and financial stability.
Fondly known as the “Old Lady” of Threadneedle Street, the Bank of England fulfills its monetary stability mission very seriously. Not only is the bank responsible for upholding public trust in the national currency, but it also designs, produces, and circulates high-quality, durable banknotes equipped with advanced security features. These measures ensure that pound sterling notes are resilient against counterfeiting attempts and easily verifiable.
The bank’s role includes preserving the value of the pound sterling over time, enabling businesses and consumers to save, plan, invest, and spend with confidence. The Bank achieves this crucial objective of maintaining confidence in the currency through its monetary stability goal. This is accomplished by ensuring stable, low prices across the wide range of goods and services available throughout the United Kingdom. The government has defined price stability as an inflation rate of two percent year-on-year, as measured by the Consumer Prices Index. Decisions to meet this inflation targeting objective are made by the Bank of England’s Monetary Policy Committee (MPC).
The financial crisis of 2008 demonstrated that price stability alone is insufficient to guarantee overall economic stability. Thus, the bank’s second mandate is to ensure financial stability, which involves fostering public confidence in the critical financial markets, institutions, infrastructures, and the system as a whole.
Following the financial crisis, the Bank of England acquired several additional crucial responsibilities to help it maintain financial stability in the UK. The first of these new powers is the Bank of England’s Prudential Regulation Authority (PRA), which allows it to promote the financial soundness and safety of the numerous vital financial firms in this global banking hub. The PRA supervises and regulates approximately 1,700 different banks, credit unions, building societies, insurance companies, and major investment firms.
The second new authority is the Bank of England’s Financial Policy Committee (FPC), designed to enhance and safeguard the stability of the British financial system as a whole. The FPC strives to mitigate or eliminate risks to the overall system, focusing on preventing future financial crises or, at the very least, reducing their severity and frequency.
In addition to these important roles, the Bank of England has several other tasks to foster financial stability. These include providing services as a market maker and lender of last resort during times of financial stress, monitoring and regulating the crucial clearing, payment, and settlement systems in Britain, and working to orderly wind down any failing financial institutions.
While some may argue that the bank’s numerous responsibilities are too extensive and diverse, the Bank of England is confident in the advantages of performing all these tasks under one institutional roof. The various responsibilities and duties require a common set of analyses, information, and skills to complete. Many of the competing objectives are interconnected, necessitating swift, capable, and efficient management and decision-making regarding any conflicting trade-offs.
Ultimately, it is the bank’s task to carry out each of these roles by working with effective coordination. This approach helps the Bank of England maximize the effectiveness of its various functions and responsibilities in serving the United Kingdom’s financial and economic interests.
