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What is the Bank of England (BOE)? What are its Objectives?

What is the Bank of England (BOE)? What are its Objectives?

Introduction

The Bank of England (BoE) is the central bank of the United Kingdom and the model for many modern central banks around the world. Established in 1694, the BoE has evolved over time and plays a crucial role in the UK's monetary policy, financial stability, and currency issuance. Its primary objectives and functions are defined by its governing legislation, the Bank of England Act 1998, and subsequent amendments.

The Objective

  • Monetary Stability: The primary objective of the BoE is to maintain monetary stability, which is typically interpreted as maintaining low and stable inflation. The government sets an inflation target, which is currently set at 2% as measured by the Consumer Prices Index (CPI). The BoE's Monetary Policy Committee (MPC) is responsible for setting interest rates and implementing monetary policy measures to achieve this inflation target.
  • Financial Stability: The BoE is also responsible for promoting financial stability within the UK. This involves identifying and monitoring risks to the stability of the financial system, including risks related to banks, financial markets, and other financial institutions. The BoE's Financial Policy Committee (FPC) is tasked with assessing systemic risks and taking action to mitigate them, such as setting capital requirements for banks and implementing macroprudential policies.
  • Supporting the Economic Policy of the Government: The BoE is required to support the economic policy of the UK government while pursuing its primary objectives of monetary and financial stability. This includes cooperating with the government on matters related to economic growth, employment, and other economic objectives.
  • Issuing Currency: The BoE has the sole authority to issue banknotes and coins in England and Wales, as well as regulate the issuance of banknotes by commercial banks in Scotland and Northern Ireland. It works to ensure the integrity and security of the currency and oversees the issuance and circulation of banknotes and coins.
  • Banking Supervision and Regulation: While banking supervision was historically separate from the BoE, since 2013, the BoE has assumed greater responsibility for banking supervision through the Prudential Regulation Authority (PRA). The PRA, which operates as part of the BoE, supervises banks, building societies, credit unions, and insurance companies to ensure they operate safely and soundly and comply with relevant regulations.

Conclusion

Overall, the Bank of England plays a central role in maintaining monetary stability, promoting financial stability, and supporting the economic policy of the UK government. Its objectives are aimed at achieving these goals while ensuring the stability and integrity of the financial system and the currency.