The central banks of a country’s economy act a monetary and financial pillar. A stabile monetary and financial policy is essential for the economic progress. Central Banks are also vested with certain supervisory so that banks and various other financial institutions do not behave irresponsibility. The functions of central banks widely vary form one country to another. Some of the important functions of the central bank of a country are as follows: • Issuance of bank notes Managing the country’s foreign exchange and gold reserves.
• Deciding on the official interest rate to manage inflation.
• Regulation and supervision of the banking industry. In most countries the central banks are state-owned and their policies, therefore, are subject to government interference. On the other hand, “independent central banks” are the ones that function with least government intervention. These banks operate under rules designed to wipe of f the possibilities of political interference; examples include the US Federal Reserve, the Reserve Bank of India, the Bank of Japan, the Bank of England, the Deutsche Bundesbank, the Bank of Canada, the Reserve Bank of Australia and European Central Bank.
However, it is improper to say that these “independent central banks” are entirely beyond the scope of political interference. Bank of England. The Bank was established as a corporate body by Royal Charter under the Bank of England Act 1694 and was nationalized on 1 March 1946. The bank was granted independence in 1997. Bank of England has an integral place in the UKs financial system and is committed to promoting and maintaining monetary and financial stability in order to ensure the economic health of the United Kingdom.
The goal of the bank is also maintain stable and efficient monetary system in the country.
As the central bank of the United Kingdom the bank is responsible for entire central banking functions in the region. The basic purpose of the bank is to maintain price stability in the country and support the economic policies of Her Majesty’s Government. Besides above functions the Bank of England is required to undertake the following important activities: • Issue banknotes and control their circulation in England and Wales. • Act as the banker to the Government and the commercial banks of the country. • Regulate and supervise the activities of the banking system in the country.
The 1998 Bank of England Act sets out the current governance and accountability framework. The Act stipulated setting up a Court of Directors, a committee on Non-executive directors within the contours of the Court, and a monetary policy committee. The Court consists of the Governor, two Deputy Governors and 16 Directors. All the Directors are non-executive so far as their powers are concerned. The Crown appoints the Governor and the Deputy Governor for a period of five years, while the directors have the tenure of three years. Functions of the Bank. The Bank of England performs all the functions of a central bank.
The most important of these supposed to be maintaining price stability and supporting the economic policies of the UKs government, thus promoting economic growth. There are two main areas witch are tackled by the Bank to ensure it carries out these functions efficiently: • Monetary stability. Stable prices and confidence in the currency are the two main criteria for monetary stability. Stable prices are maintained by making sure price increases meet the Governments inflation target. The Bank aims to meet this target by adjusting the base interest rate, which is decided by the Monetary Policy Committee, and through its communications strategy.
• Financial stability. Maintaining financial stability involves protecting against threats to the whole financial system. Threats are detected by the Banks surveillance and market intelligence functions. The threats are then dealt with through financial and other operations, above at home and abroad. In exceptional circumstances, the Bank may act as the lender of last resort by extending credit when no other institution will. The Bank works together with several other institutions to secure both monetary and financial stability, including: • HM Treasury, the Government department responsible for financial and economic policy.
• The Financial Services Authority, an independent body that regulates the financial services industry. • Other central banks and international organizations, with the aim of improving the international financial system. The 1997 Memorandum of Understanding describes the terms under witch the Bank, Treasury and the FSA work toward to common aim of increasing financial stability. The Bank of England acts as the Governments bankers, and as such it maintains the Governments Consolidated Fund account. It also manages the countries foreign exchange and gold reserves.
The bank also acts as the bankers’ bank, especially in its capacity as a lender of last resort, and maintain its pragmatic experience in all aspects of banking also provides commercial and retail banking facilities to a very limited number of corporate institutions and individuals. The Bank of England has a monopoly on the issues of banknotes in England and Wales. Scottish and Northern Irish banks retain the right to issue their own banknotes, but they must be backed one to one with deposits in the Bank of England, excepting a few million pounds representing the value of notes they had in circulation in 1845.
The Bank decided to sell its bank note printing operations to De La Rue in December 2002, under the advice of Close Brothers Finance Ltd. Since 1997 the Monetary Policy Committee has had responsibility for settings the official interest rate. However, with decision to grand the Bank operational independence, responsibility for government debt management was transferred to the new UK Debt Management Office in 1998, which also took over government cash management in 2000. Computershare took over as the registrar for UK Government bonds (known as gilts) from the Bank at the end of 2004.
The Bank used to be responsible for the regulation and supervision of the banking industry, although this responsibility was transferred to the Financial Services Authority in June 1998. In order to help maintain economic stability, the Bank attempts to broaden understanding of its role, both through regular speeches and publications by senior Bank figures, and through a wider education strategy aimed at the general public. It maintains a free museum and runs the Target Two Point Zero competition for A-Level students. Governor of the Bank of England.
The Governor of the Bank of England is the most senior position in the Bank of England. It is nominally civil service post, but the appointment tends to be from within the Bank, with the incumbent grooming his or her successor. The Governor of the Bank of England is also chairman of Monetary Policy Committee, with a major role in guiding national economic and monetary policy, and therefore one of the most important public officials in the UK. Monetary Policy Committee (MPC) Interest rates are set by the Banks Monetary policy Committee.
The MPC sets an interest rate it judges will enable to inflation target to be met. The banks MPC is made up of nine members- the Governor, two Deputy Governors, the Banks Chief Economist, the Executive Director for Markets and four external members appointed directly by the Chancellor. The appointment of external members is designed to ensure that the MPC benefits from thinking and expertise in addition to that gained inside the Bank of England. Members serve fixed terms after which they may be replaced or re-appointed.
Each member of the MPC has expertise in the field of economics and monetary policy. Members do not represent individual groups or areas. They are independent. Each member of the Committee has a vote to set interest rates at the level they believe is consistent with meeting the inflation target. The MPCs decision made on the basis of one-person, one vote. It is no based on a consensus of opinion. It reflects the votes of each individual members of the Committee. A representative from the Treasury also sits with the Committee at its meeting.
The Treasury representative can discuss policy issues but it no allowed to vote. The purpose is to ensure that the MPC is fully briefed on fiscal policy developments and other aspects of the Governments economic policies, and that the Chancellor is kept fully informed about monetary policy. How Monetary Policy Works. When the Bank of England changes the official interest rate it is attempting to influence the overall level of expenditure in the economy. When the amount spent grows more quickly than the volume of output produced, inflation is the result.
In this way, changes in interest rate are used to control inflation. The Bank of England sets an interest rate at which it lends to financial institutions. This interest rate then affects whole range of interest rates sets by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.
A reduction in interest rates makes saving less attractive and borrowing more attractive, which stimulates spending. Lower interest rates can affect consumers and firms’ cash-flow-a fall in interest rates reduces the income from savings and the interest payments due on loans. Borrowers tent to spend more of any extra money they have than lenders, so net effect of lower interest rates through this cash-flow channel is to encourage higher spending in aggregate. The opposite occurs when interest rates are increased. Lower interest rates can boost the prices of assets such as shares and houses.
Higher house prices enable existing home owners to extent their mortgages in order to finance higher consumption. Higher share prices raise households’ wealth and can increase their willingness to spend. Changes in interest rates can also affect the exchange rate. An unexpected rise in the rate of interest in the UK relative to overseas would give investors higher return on UK assets relative to their foreign-currency equivalents, tending to make sterling assets more attractive. That should rise raise the value of sterling, reduce the price of imports, and reduce demand for UK goods and services abroad.
However, the impact of interest rates on the interest rates on the exchange rates is, unfortunately, seldom that predictable. Changes in spending feed through into output and, in turn, into employment. That can affect wages costs by changing the relative balance of demand and supply for workers. But it also influences wage bargainers’ expectations of inflation- an important consideration for the eventual settlement. The impact on output and wages feeds through to producers’ coasts and prices, and eventually consumer prices.
Some of these influences can work more quickly than others. And the overall effect of monetary policy will be more rapid if it is credible. But, in general, there are time lags before changes in interest rate affect spending and saving decisions, and longer still before they affect consumer prices. As banker to the Government and the banks, the bank is able to forecast fairly accurately the pattern of money flows between the Governments accounts on one hand and the commercial banks on the other, and acts on a daily basis to smooth out the imbalances which arise.
When more money flows from the banks to the Government than vice versa, the banks holdings of liquid assets are run down and the money market finds itself short of funds. When more money flows the other way, the market can be in cash surplus. In practice the pattern of Government and Bank operations usually results in a shortage of cash in the market each day. The Bank supplies the cash which the banking system as a whole needs to achieve balance by the end of each settlement day. Because the Bank is the final provider of cash to the system it can choose the interest rate at which the Bank supplies these funds each day.
The interest rate at which the Bank supplies these funds quickly passed throughout the financial system, influencing interest rates for the whole economy. When the bank changes its dealing rate, the commercial banks change their own base rates from which deposit and lending rates are calculated. Financial crisis. It is global. While most emphasis was initially on the sub-prime market in the United States, the crisis has spread rapidly through the UK and across Europe, has resulted in a 60% fall in the Shanghai stock market in a year, steep stock market falls across much of Latin America and bank crises in Australia and New Zealand.
It has initially been crisis of liquidity and confidence in the financial sector rather than a decline in industrial and retail activities, but it is expected to have a substantial effect on industrial and commercial output as sources of investment of financial diminish. The path to the Crash in UK Interest rates… As, Gordon Brown says:” the government having abandoned all of the fiscal rules that it once prided itself on religiously following, is now hell bent on kick starting the UK economy in advance of the looming May 2010 general election deadline.
The as she goes economic policy has been replaced by the panicking unprecedented actions economic policy and in that having rested away control of UK interests settings from the Bank of England in all but name, UK interest rates are now set to be the latest to take a crash course towards an unprecedented level of just 1%. UK Housing Market Crash of 2007-2008.
The housing market started the crash ball rolling as the interbank money markets first froze in August 2007 as financial intuitions were no longer able to accurately price and trade their U. S. subprime mortgage backed securities that led to an increase in the risk of default that soon spread to non subprime related derivatives, to an active derivatives trader this clearly spelled doom for the UK housing and implied an imminent downtrend in house prices, the magnitude of which was originally estimated to be at least at the rate of 7,5% per annum. UK Economic Contraction and Deflation. The UK economy is expected to contract by at least 3% for the period to the end 2009. This contraction coupled with the slump in asset prices is highly deflationary and expected to lead to a sharp fall in the rate of UK inflation into Mid 2009.
However deflation will be short lived and my expectations are for a V shaped bottom and for inflation to resume and trend of towards 2% CPI by early 2010, which suggests ultra low interest rates will not say around for long and follow inflation higher by the end of 2009. British Pound Inflationary Crash.
Sterling has already fallen by 30% against the US dollar, this means goods in the shops are 30% cheaper for Americans, and 22% cheaper than Europeans, this disparity is not going to hold for much longer especially as long range forecast is for sterling to trend down towards pound/$ 137. 50 multi decade support level which may give temporary respite to the sterling bear market. The Libor interbank rate continues to ease from credit quake extremes, bringing the spread between the base rate and the Libor rate to below 1% and on target to achieve the pre-credit crisis spread rate 0. 75% above the base rate. However a rate cut today will temporarily lead to a widening in the Libor spread as the market will take some weeks to adjust to the rate cut.
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