The Role of the Bank of England

The Bank of England performs several tasks in the UK economy.

1. It issues notes and coins. The Bank of England is the sole issuer of notes and coins in the UK. In theory you could take a £10 note to the Bank of England and ask for you equivalent sum of Gold. I don’t know whether they would take kindly to such requests but in theory that is how they maintain confidence in notes and coins as a medium of exchange

2. Managing the government’s debt. National Debt in the UK At the end of 2005/6 general government debt was £529.1 billion, equivalent to 42.1 per cent of GDP. [1]
To manage the government debt the bank of England sell bonds and gilts to the private sector. Usually bonds have a lifetime of about 30 years. In order to encourage people to buy government debt they need to offer an attractive interest rate. Interest payments on UK debt amount to nearly £30 billion a year

3. Managing Monetary Policy. In particular the MPC Monetary Policy Committee is responsible for changing interest rates in order to keep inflation within the governments target of CPI 2% +/-1. To achieve this inflation target the MPC meet every month and examine future inflation trends. If inflation looks to be increasing then they will vote to increase interest rates in order to dampen demand.

4. The Bank of England actually set the base rate of “repo” rate. This is a rate at which they lend to the commercial banks. They keep the banks short of liquidity so that they often have to borrow on this repo rate. If this repo rate changes then the commercial banks usually pass the changes on to their customers by changing there own interest rates.

5.. Acting as lender of last resort. If the commercial banks are short of cash then they go to the Bank of England who will be able and willing to lend them money. This is important for the banking system because it ensures the banks are never short of cash and so people have confidence in the banking system.

6. The Bank of England oversees the banking and financial system of the UK

[1] http://www.statistics.gov.uk/cci/nugget.asp?id=277

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