Kavan Choksi Highlights the Functions and Responsibilities of the Bank of England (BoE)

The Bank of England (BoE) is the central bank of the United Kingdom. It serves the U.K. government as the official banking institution for monetary affairs. Kavan Choksi mentions that the central offices of the BoE is located in Threadneedle in London’s financial district, and hence, it is often called the “the Old Lady of Threadneedle Street.” BoE is among the oldest banks in the world, and has been the structural model for many other central banks.

Kavan Choksi shares insight into the functions and responsibilities of the Bank of England

The Bank of England (BoE) was established in 1694 as a private entity. It remained a private entity for more than two centuries, before being nationalized in 1946. BoE became an independent public organization wholly owned by the Treasury Solicitor in 1998.  Today it is renowned for being a top monetary and financial authority in the United Kingdom.  In this role, BoE assumes the role of guarding the financial system of the UK, and ensuring the well-being of the British economy. Its important responsibilities include:

• Acting as the lender of last resort in financial matters
• Custodianship of the gold reserves in the United Kingdom
• Overseeing the national economic health of the United Kingdom
• Issuing banknotes, setting interest rates and governing the value of British Pound Sterling (GBP),
• Governing the value of British Pound Sterling (GBP), setting interest rate and issuing banknotes
• Planning and executing monetary policy as per the economic policies of the government
• Implementation of economic interventions for the purpose of managing economic growth
• Regulating and ensuring the integrity of financial markets, financial institutions and banks

The impact of the Bank Of England on the economy of the United Kingdom is largely based on interest rate decisions, as well as discerning other economic interventions by the Monetary Policy Committee (MPC). This committee meets eight times in a year for evaluating the economic performance of the country, in light of the monetary policy goals for unemployment rate, inflation level and GDP.  In case these figures are off the mark, negatively or positively, the MPC may use certain tools for bringing the economy back on track.  Some of the key tools used by the MPC are minimum reserve requirements, asset purchase facilities and interest rate decisions. Each of these tools is aimed at modifying the money supply in circulation, and hence has a considerable impact on the value of the British Pound Sterling and other U.K. assets.

As per Kavan Choksi, when the economy of the United Kingdom is performing very well, increasing inflation may lead to unemployment as a result of the growing salary demands of the employees. Such a situation can ultimately lead to reduced consumer spending. The MPC may opt to adopt a hawkish attitude and slow down the growth with an interest rate hike. Higher interest rates would improve the yields of securities like savings, bonds and U.K. Gilts, and can encourage the investors to redirect their active capital from riskier assets. On the other hand, the high cost of loans discourages people from adding more cash into the economy, thereby reducing their demand, and slowing down inflation.