What does the Bank of England do?

The Bank of England (BoE) is the central bank of the United Kingdom. The BoE has several functions:

  • overseeing monetary policy
  • issuing currency and supervising payment services
  • regulating UK banks and other financial firms
  • maintaining a resilient UK financial system.

The BoE was initially founded in 1694 as a private bank to raise funds for the government. It began issuing bank notes in England and Wales in 1844 and was nationalised in 1946 following World War II. In 1997, the government transferred its authority over to the BoE’s Monetary Policy Committee (MPC) which then became responsible for setting the UK’s benchmark interest rate. 

Today, the bank’s main objective is to manage the state of the economy and maintain price stability. It does this through its MPC, which has a primary mandate of keeping the annual inflation rate at 2% (as at January 2023). This 2% level is determined by the UK Government, but the BoE is independent in its decision making.

The MPC manages inflation by setting the core interest rate at which it lends to the banks, and by buying (or selling) assets. This process is called monetary policy.

The MPC convenes eight times a year to set rates. After a series of preliminary meetings, the committee's nine members vote on whether to increase, reduce or hold interest rates.

Increasing interest rates, also known as tightening monetary policy, is designed to reduce inflation by making borrowing more expensive, giving people less money to spend and therefore lowering demand. Antithetically, if the Bank cuts rates, also referred to as loosening or easing policy, borrowing becomes cheaper and people may be inclined to spend more, which in turn boosts the economy but can push prices up.

The Bank can also provide economic stimulus through asset purchases. This policy is known as quantitative easing (QE). Here the Bank purchases government bonds and other securities on the open market, providing banks with more liquidity, which further lowers interest rates and enables them to lend with easier terms.