Bank of England

The Bank of England (BoE) is the central bank of the United Kingdom. It plays a key role in stabilising the economy and country while developing a resilient financial system. The Bank of England also generates 5, 10, 20, and 50-pound paper notes to circulate throughout the UK.

In this guide, we cover the central bank’s powers, monetary policy, base rate history, and more. We also explain the Bank of England’s influence on trading and investment activities in the UK.

What Is The Bank Of England?

The Bank of England is an independent organisation, owned by and accountable to the UK government. Its main objective is to manage the stability of the domestic economy by controlling interest rates, buying and selling government bonds, and producing legal tender in the form of sterling banknotes. The Bank of England also acts as a ‘gold bank’, storing the UK and other central banks’ gold reserves worth over £200 billion in an underground vault.

In addition, the institution works to regulate UK banks and financial firms, alongside the Financial Conduct Authority (FCA). The BoE is permitted to act as a lender for commercial banks suffering from cash shortfalls, with a historic loan repayment value in the region of £25 billion.

Whilst retail investors may not see the Bank of England logo when they trade with online brokers, the organisation plays an important role in the background. With that said, it does not have any control over forex rates.

History

The Bank of England was founded in July 1694 by the UK parliament to raise funds for the government. Its mission was to ‘promote the public good and benefit of our people’. The Bank later formed a conventional financial business, accepting deposits from members of the public.

Key milestones in its history include:

• 1725 – Partially printed banknotes were introduced to replace hand-written deposits
• 1734 – The Bank established headquarters in Threadneedle Street, where it remains today
• 1797 – Concerns of a French invasion of Britain caused a public frenzy to convert banknotes into gold. A later shortage of gold saw a restriction of this activity until 1821
• 1826 – The first Bank of England branch opened in Gloucester to control bank note circulation
• 1844 – The Bank Charter Act was established detailing the powers and issuance rules of banknotes across the UK
• 1914 – Bank of England staff were granted full pay to serve in the armed forces during WW1. The BoE played a role in financing the war by issuing war stocks in 1914
• 1931 – The ‘gold standard’ linking its value to the UK pound sterling was suspended in September
• 1946 – The bank was nationalised – it was to be owned by the government rather than private stockholders
• 1960 – The first edition of the Bank of England quarterly bulletin report was published, detailing economic statistics in the private sector
• 1992 – The British government removed the UK from the European Exchange Rate Mechanism (ERM)
• 1993 – The first inflation report was published to provide detailed data on the progress being made towards the government’s inflation targets
• 1996 – The first Financial Stability Report was published indicating the stability and risks threatening the financial system. The BoE also saw the launch of the real-time gross settlement procedure so banks could settle payments
• 2012 – The Prudential Regulation Authority (PRA) and Financial Policy Committee (FPC) were formed to strengthen oversight of the UK economy

Structure

The Bank of England is a public body that operates alongside the government. With that said, the BoE was granted independence in some major areas, such as interest rate decisions and other base rate discussions.

A team of directors leads the Bank of England, developing strategies and making financial decisions in the interest of the UK. All chair members are chosen by the government.

Team structure:

• One Governor (Andrew Bailey – term began in March 2020)
• Four Deputy Governors
• Seven Non-Executive Governors

The Bank of England Court of Directors are regularly required to present data and information on key decisions to the UK’s House of Commons Treasury Committee. This is to clarify changes to monetary policy, base rate predictions, economic forecasts, and to provide general guidance to the government.

Also chaired by the leading Governor to assist with policy creation:

• The Financial Policy Committee
• The Monetary Policy Committee
• The Prudential Regulation Committee

The Bank of England is based in an address in Central London on Threadneedle Street.

Role & Responsibilities

Inflation

One of the key goals of monetary policy is to control inflation with an annual target in the UK of 2%.

Inflation is essentially the measure of how much prices increase over time. To keep a stable and relatively low inflation rate, the Bank of England amends the base interest rate. This is the rate used to lend funds to banks which are then passed on to customers when borrowing money in the form of a mortgage, for example. Importantly, an interest rate hike makes it more expensive for UK individuals to borrow funds.

In December 2022, the UK’s inflation rate was measured at 10.5% thanks to soaring energy costs and higher food prices as a result of the Russia-Ukraine war. To counteract this, the Bank of England increased interest rates to 4% to reduce demand for products and slow down rising prices for consumer goods. The 2023 inflation forecast estimated a fall to 3.75% by the end of the year, though this is still significantly higher than the 2% target.

Interest Rate History

• The first recorded interest rate was 11.25% in January 1975
• The highest base rate was registered in November 1979 at 17%
• A steady rate of 0.5% was maintained between March 2009 and August 2016
• The Covid pandemic saw the base rate drop to the lowest rate ever at 0.10% in March 2020

Payment Services

The Bank of England is responsible for producing new currency and banknotes in the UK. This includes implementing robust security measures to reduce the likelihood of any counterfeit circulation risk.

As well as distributing pound notes, the BoE oversees payment solutions within the UK such as CHAPS and RTGS. As the payment system is crucial to the stability of the UK economy, electronic solutions for individuals and banks are overseen by the Bank of England, ensuring balances are settled and transfers are completed efficiently.

More recently, the Bank of England has been reviewing whether a central bank digital currency (CBDC) should be used. This would introduce digital/electronic money instead of physical notes, which can be used for transactions and payment settlements. Unlike cryptocurrency such as Bitcoin, a central bank digital currency would be issued by the BoE, and retain its value over time.

Stability

The Prudential Regulation Authority (PRA) standardises and supports UK banks, investment firms and other financial services organisations in the United Kingdom. This includes oversight from the Financial Policy Committee (FPC), which monitors risks and implements controls if there could be potential harm to customers and consumers.

This data is published to the public in a bi-annual Financial Stability Report and examines the responses to these concerns.

Powers

Most of the Bank of England’s controls come through PRA intervention. The Prudential Regulation Authority has the power to impose fines or restrictions on companies operating in the financial services sector, including broker-dealers.

Investigations are used to determine whether there has been a breach of regulatory minimums, with the relevant action then taken. Many of these enquiries are conducted with the Financial Conduct Authority (FCA). For example, the FCA fined three brokers (BGC Brokers LP, GFI Brokers Limited, and GFI Securities Limited) almost £5 million in 2022 for failure to implement suitable detection systems to restrict market manipulation and insider dealing.

Relevance To Retail Traders & Investors

Although the Bank of England may not have as much direct influence on retail traders as the FCA, it does play an important role and its actions can cause volatility in the financial markets.

Economic updates and events such as recessions or interest rate rises can impact the value of stocks, indices, or bonds. For example, if the BoE hikes interest rates, the value of the GBP may rise. Alternatively, if the Bank of England broadcasts that quantitative easing (also known as quantitative tightening) measures are being taken, then the value of the pound may fall.

Changes introduced by the Bank of England can also negatively impact the amount of disposable income available to retail investors. Interest base rate hikes to stabilise inflation will lead to an increase in borrowing costs, which may impact the amount of money individuals have to trade online.

Bottom Line On The Bank Of England

The Bank of England has a pivotal role to play in the resilience of the UK’s financial system. Historical interest rates and inflation forecasts can also provide valuable information to retail investors looking to make predictions about particular markets. The BoE’s coordination with the PRA and FCA also exerts control over online brokers either based in the UK or providing trading services to residents of the UK.

FAQ