Achievements of Bank of England
The Bank of England gained operational independence in 1997 (Taaffe, 2017). It functions as the central bank for the United Kingdom. The bank started operations in 1694 as a private institution with the power to raise money for the government through the issuance of bonds. It then accepted deposits like other commercial banks. BoE was first issued with the monopoly of issuing banknotes in England and Wales in 1844. It was then nationalized in 1946 after World War II. In 1997, the functions of monetary policy were relinquished by the government to BoE (King, 2017). Like any other central bank, it has wide range of responsibilities. Since its independence, the bank functions as the lender of the last resort, the United Kingdom’s bank, issue currencies, and formulate monetary policy. It also makes policies during periods of economic downturns and increased uncertainty.
The creation of banknotes has become more liberal and democratic. The Bank has created public confidence in banknotes. Being the only bank that can issue banknotes, BoE prides itself on striving to ensure the notes are of high quality, durable and difficult to counterfeit. People will have the feel of genuineness in the new banknotes because they are made with the latest anti-forgery features. The bank works closely with De La Rue to make sure the notes are defined to make it difficult and time-consuming to forge. The plans are underway to release new polymer £20 notes by early 2020, and £50 notes will be issued by 2021. When these notes are entirely in circulation, they will create confidence in transactions. The bank is also applauded for its transformative ideas of creating diversity and cultural recognition to feature mathematician, Allan Turing.
The BoE has succeeded in keeping the United Kingdom’s economy on the right track through monetary policy. Since independence, the bank has been regulating interest rates up and down while supplementing it with measures such as quantitative easing. It is the role of the Monetary Policy Committee to make decisions on monetary policy. The bank influences how much prices are rising. Thus, it uses monetary policy to achieve the target inflation level at 2 percent (Bank of England, 2019, p. 2). The low and sustainable inflation rate is suitable for economic growth and development. The bank has been active in supporting the UK government in the achievement of economic growth and job creation. Thus, the current bank rates stand at 0.75 while inflation is 1.7 percent below the target rate.
Therefore, the setting of interest rates has been free from politics. Before 1997, interest rates were changing sporadically any time on any day. The chancellor would call the treasure at any time to discuss the change in interest rates without any consultations and unsystematic. For instance, after receiving the budget, the government had the freedom to reward itself with a cut in interest rates. When the inflation targets were introduced after 1992, a systematic process was introduced when the chancellor and the governor would meet with advisors for deliberations. However, even after the establishment of a system, politics found their way in decision making. Under the current Monetary Policy Committee, the decisions on interest rates are made through majority votes.
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Figure 1: Source: https://www.tutor2u.net/economics/reference/monetary-policy-the-bank-of-england
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Figure 2: Source: https://www.tutor2u.net/economics/reference/monetary-policy-the-bank-of-england
There were clear roles of BoE and Treasury before independence. After 1997, the Treasury was able to adjust to its position of fiscal policy and other factors affecting the economy leaving monetary policy a function of BoE. Thus, the constrained relationship that existed before independence ended. The implication of the stability in the regulation of monetary policy led to higher economic performance. The action for BoE independence also reduced the perceived powers of the governor. Compared to the previous period in 1970s, the inflation rates were averaging at 27 percent. Even at the times of Thatcher, the average inflation was 8 percent. However, since the introduction of inflation rate targets in 1992 and five years after creating an independent BoE, the inflation rate has been low and stable. Instability in inflation is a significant concern to businesses and households. After the bank succeeded in making inflation sustainable and steady, it has been removed as a significant worry. As a result, for the last two decades, economic growth has been rising and stable. The strong monetary policy could have made Britain stand out against 2007/2008 global financial crisis. Some historians argue in support of the removal of bank supervision by the BoE in 1997. The independence of the central bank played a critical role in the handling of the financial crisis. The coordination between BoE and the U.S. Federal Reserve led to interest rates cut in 2008.
- Quote paper
- George Kariuki (Author), 2019, Monetary and Fiscal Achievements of Bank of England since Independence in 1997, Munich, GRIN Verlag, https://www.grin.com/document/509590