The Bank of England (BoE) is responsible for managing the monetary policy of the United Kingdom and maintaining the supply of money in the economy. As Kavan Choksi Wealth Advisor says, the BoE has a key role to play in the management of the economy and finance sector. It was founded in 1694 as a private bank that lent money to the Government to finance the growing national debt. By the nineteenth century, the Bank of England had become the official Central Bank of the UK.
Kavan Choksi Wealth Advisor sheds light on the Bank of England’s function of setting interest rates
The Bank of England was provided with the responsibility to set interest rates in 1997. This was a role formerly undertaken by the Chancellor of the Exchequer. The Bank produces an inflation forecast and sets interest rates according to predictions of future inflation. BoE has a target to keep inflation at 2%.
The headline Consumer Prices Index (CPI) inflation rate, which tracks the price of a typical basket of goods, has gone down from a high of 11.1% in October 2022 to 3.2% in March 2024. However, CPI still is above the target of the Bank of England. The recent sharp increases in inflation were initially caused by rising food and energy expenses, which were largely a result of global events such as the war in Ukraine. Many other factors, like wage increases in the United Kingdom, also had a role to play in keeping prices high.
The traditional response of the Bank of England to rising inflation is to increase the official interest rates. This impacts the saving and mortgage rates which High Street banks and building societies charge individuals and businesses. Starting from November 2021, the Bank of England has raised interest rates 14 times, reaching 5.25%, the highest level since February 2008. Since then, the Bank has maintained this rate five times, with the most recent instance being in March 2024. Increased interest rates translate to higher mortgage costs, reducing disposable income for other expenses. This decreased consumer demand theoretically slows down price inflation, while also presenting challenges for businesses seeking loans for growth and expansion.
On the other hand, in case the Bank of England lowers the interest rates, borrowing becomes more affordable, and people have more money to spend on other things. This can encourage both individuals and businesses to borrow and spend more bunds, thereby boosting the economy.
The Bank’s Monetary Policy Committee (MPC) of the Bank of England meets eight times a year to set rates. Its nine members vote on whether to increase, reduce or hold interest rates, and the minutes of the meeting at which the decision was taken are published. The Bank also publishes a Monetary Policy Report four times a year, which is meant to underline the economic analysis and inflation projections used by the MPC to make its interest rate decisions.
As Kavan Choksi Wealth Advisor mentions, in addition to setting interest rates, there are several other functions carried out by the BoE. These functions include producing banknotes and overseeing credit and debit card payments, regulating banks and building societies, as well as monitoring risks in the UK financial system.
