All about the Bank of England

The Bank of England (BoE) is more than 300 years old and for most of that time, its headquarters have been located on Threadneedle Street in the central financial district of the City of London. Traders and analysts refer to the UK’s central bank as the “The Old Lady of Threadneedle Street’”– or “The Old Lady.”

Why is the Bank of England called the Old Lady?

The nickname goes back to 1797 when James Gillray published a cartoon showing an old lady representing the Bank of England.

The cartoon shows the Prime Minister of the time, William Pitt the Younger trying to woo an old lady and get his hands on her gold coins in her pocket and the chest on which she is sitting. The Old Lady represents the Bank of England and the chest on which she is seated represents the bank’s gold reserves. In the image, you can see a document titled “Loans” which refers to William Pitt’s government’s persistent demands to borrow money from the Bank of England.

A quick overview of the BoE

The Bank of England was incorporated in 1694 to raise funds and support the English government in its war against France in the Low Countries. The bank was the only bank that operated as a joint-stock bank since joint-stock banks were only allowed in England and Wales after 1826. Being the government’s banker and the only joint-stock bank of its time allowed the Bank of England to enjoy considerable advantages.

Firstly, located in Mercers’ Hall, subsequently in Grocers’ Hall, and later in the 1730s to its permanent location on Threadneedle Street the Bank of England was the biggest and most respected financial institution in England. It acted as a banker to other banks and allowed banks to settle their debts by keeping their balances with the BoE.

It was during the 19th century that the bank undertook the role of the central bank, printing legal tender, and acting as the lender of last resort and guardian of the nation’s gold reserves. In 1946 it was nationalised and became responsible for funding public borrowing, issuing bank notes, and managing gold and foreign-exchange reserves.

One of the bank’s main responsibilities is its role as an adviser to the government on monetary policy and its responsibility to implement the selected monetary policy. In 1997, it was given the power to set short-term interest rates.

Monetary Policy Report

The Bank of England publishes a quarterly report analysing the economy and presenting its inflation outlook. Based on this data, the Bank’s Monetary Policy Committee will decide whether to raise, keep the same or cut interest rates. It also assesses projections for UK inflation over the next two years.

Traders watch interest rate changes closely as short-term interest rates affect currency valuation.

A higher-than-expected rate is positive for the GBP, while a lower-than-expected rate tends to push the pound lower.

Bank of England Governor: Andrew Bailey

Andrew Bailey was announced as the new Governor of the Bank of England in December 2019 and started his term in March 2020. He served as Chief Executive Officer of the Financial Conduct Authority (FCA) served as Deputy Governor, of Prudential Regulation and CEO of the PRA. He joined the Financial Services Authority in 2011 as Deputy Head of the Prudential Business Unit and Director of UK Banks and Building Societies and was later Managing Director of the Prudential Business Unit.

As a Governor of the BoE, Bailey has come under fire for his response to high inflation. Early on however he recognised how damaging inflation will be and warned about the risks that lay ahead. He stated: “I recognise the significant impact this will have, and how difficult the cost of living challenge will continue to be for many people in the United Kingdom. Inflation hits the least well-off hardest. But if we don’t act now to prevent inflation from becoming persistent, the consequences later will be worse and will require larger increases in interest rates.”

He also abandoned his predecessor’s policy of providing “forward guidance” and was accused of not offering a similar framework as the Fed or ECB in terms of decision-making.

What is Bank Rate?

Bank Rate is the main interest rate in the UK and is also known as the “Bank of England base rate” or just “the interest rate.”

The central bank’s Monetary Policy Committee (MPC) sets Bank Rate and ensures that inflation will remain low and stable.

Bank Rate influences the rates banks to charge their clients to borrow money or pay on their savings. If Bank Rate changes, then banks change their interest rates on saving and borrowing. However, interest rates don’t always change in line with Bank Rates and can be readjusted for other reasons. The current Bank Rate is 4.5%, with the next due out on the 22nd of June 2023.

Bank Rate and Inflation

When there are changes in Bank Rate, then people’s spending power can be influenced and this can also affect how much things cost. By changing Bank Rate the BoE can influence prices and inflation. The target for inflation is 2% and the BoE ensures that they manage and control inflation so it doesn’t get too high. At the moment, inflation is elevated. Britain has higher and more persistent inflationary pressures than either the US or the Eurozone. The latest inflation figures show that price increases have fallen to 8.7% for the 12 months to April 2023. This is higher when compared to 9.00% last year and much higher than the long-term average of 2.76%.

How does the Bank Rate influence your finances?

If rates are low then this will affect your savings, as you will get less interest on your savings. At the same time, it will benefit households and businesses as they can borrow funds—get a loan or mortgage—with cheaper interest payments.

Having lower rates tends to boost spending whereas having higher rates reduces spending.

For the Bank to meet its inflation target, they need to calculate how much people will save and spend with the current interest rates. If they expect consumers to spend less then this could be detrimental to businesses and jobs, so the Bank may decide to cut rates to help boost spending.

As it stands, the Bank of England is anticipated to act more aggressively when tightening policy in order to bring persistently high inflation to normal levels. With the UK’s April inflation print remaining high, analysts expect the central bank to deliver two more 25bp rate rises (in August and September) on top of the expected rate this June, bringing Bank Rate at 5.00% by the end of Q3.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.

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