Kavan Choksi Professional Investor Briefly Sheds Light On the Functions of the Bank of England (BoE)

The Bank of England (BoE) is the central bank of the United Kingdom, and the model on which many central banks across the planet are built. As Kavan Choksi Professional Investor mentions, the BoE was established in 1694 and has since then changed from being a private bank that loaned money to the government, to being the official central bank of the UK. This bank was formed during a period of economic turbulence when the national debt was steadily increasing. BoE became the official central bank of the UK in 1946.

Kavan Choksi Professional Investor talks about some of the functions of BoE

The operations of the Bank of England (BoE) are overseen by a Court of Directors. The court members used to be appointed by the Queen, but at the recommendation of the Chancellor and the Prime Minister. It is responsible for setting and monitoring the strategy of the bank, and making vital decisions on resource utilization. There are also many subcommittees for BoE and each of them is tasked with handling specific responsibilities of the bank.

The Governor is the most senior position at the Bank of England. As opposed to the Court of Directors, the appointment for the post of the Governor comes from within the bank, with the incumbent Governor grooming their successor.

The key functions of the BoE are to maintain monetary stability in the UK and oversee the financial stability of the country’s financial system. The bank acts as the custodian of the official gold reserves in the United Kingdom, and also the lender of last resort. This leaves the US government with a huge deficit. This deficit has ranged from $400bn to $3tn each year over the last decade. The deficit amount left at the end of each year gets added on to the total debt of the country. For the purpose of borrowing money, the US treasury issues securities, like US government bonds. They eventually have to pay back this money with interest. After the United States government hits its debt limits, the treasury wouldn’t be in a position to issue more securities, ultimately stopping a key flow of funds into the federal government.

Monetary stability involves maintaining stable prices as well as confidence in the currency. For more than three centuries now the BoE has been tasked with the responsibility of issuing bank notes in the United Kingdom. Moreover, being the central bank of the country, it is also responsible for maintaining confidence that the currency in circulation in genuine. BoE has delegated the role of formulating monetary policy to the Monetary Policy Committee or MPC. This is a nine member committee led by the Governor. The other members of this committee include the BoE’s chief economist, three deputy governors and four members appointed by the Chancellor of the Exchequer. Members of the MPC meet on a regular basis in order to discuss the need to alter the interest rate policy to achieve the inflation target. They typically meet eight times a year to set rates. Its nine members vote on whether to increase, reduce or hold interest rates. Minutes of the meeting at which the decision was taken are also published.

As Kavan Choksi Professional Investor underlines, the Bank of England acts as the official gold reserves custodian for the United Kingdom, as well as certain other nations. As per estimations, this bank holds approximately 3% of all the gold mined in the history of the world. The bank had nearly 400,000 gold bullion bars, valued at £142 billion as of April 2014. BoE is also a lender of last resort for commercial banks that suffer a cash shortfall. In this role, the bank helps maintain liquidity and confidence in the financial system.

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