The Bank of
England is Independent
The Bank of England
(BOE) was founded in 1694, and despite its name is
the central bank of the entire United Kingdom. It is
the second oldest central bank in the world, behind
only Sweden's Riksbank, which was founded in 1654.
Commonly referred to as "The Old Lady of
Threadneedle Street," the bank's original functions
were to act as the government's banker and its debt
manager. The bank has evolved over its long and rich
history and with it so have its responsibilities. At
some point during its existence the BOE's duties
have included being the government's bank and debt
manager, serving as a commercial bank and other
bank's bank, issuing currency, regulating banks, and
storing the nation's gold and foreign exchange
reserves. The bank had strong ties to the government
even when it was privately owned and in the 1940's
the BOE was nationalized and fell under the umbrella
of the treasury department.
However, in
1997 the newly elected Labour Party leaders, Tony
Blair and Gordon Brown, granted the bank
independence from the government and for the first
time empowered it with control of the nation's
interest rate.
In addition to controlling the
interest rate, the bank currently controls the
foreign exchange reserves, acts as the banker's bank
and issues notes and coins. Concurrent with assuming
control of the interest rate in 1997, the bank
transferred the duty of managing the government's
debt to the Treasury Department and its regulatory
functions were assumed by the Financial Services
Authority ("FSA"). Although the bank is essentially
independent, Parliament reviews the bank's accounts
and annual report because its policies affect the
public. Additionally, it has a close relationship
with the Treasury, whose Treasury Committee conducts
regular hearings on inflation with members of the
Bank's Monetary Policy Committee ("MPC").
Furthermore, the government sets the unemployment
and growth objectives as well as an inflation target
for the economy (currently 2%), which the bank
attempts to meet. If the actual inflation rate is 1%
(or more) off target, then the Governor of the bank
must submit an explanation to the Chancellor of the
Exchequer.
Meeting the government's inflation
target is the final component of the bank's
objective to achieve monetary stability. In order to
keep prices stable and maintain non-inflationary
growth, the bank controls the short term interest
rate. Monetary policy decisions are all made by the
MPC. The MPC has nine members and consists of the
Governor, two Deputy Governors, two executive
directors of the bank and four appointees by the
Chancellor of the Exchequer.
The Governor and the Deputy
Governors are all appointed by the Crown to a term
of five years, although the Chancellor wields a
strong influence over the selections.
MPC members often travel throughout the country in
order to get a better feel for the country's overall
economy. Additionally, the MPC is committed to
transparent operations and, therefore, releases the
voting results of their meetings after just two
weeks, which is far quicker than the other central
banks. Also, they frequently publish inflation
predictions, which are available to the public.
The BOE's second objective is to
maintain financial stability. This refers to the
detection and elimination of threats to the overall
financial system. The bank closely observes the
markets and continuously strengthens the financial
infrastructure. Until 1997, this included the
supervision and the regulation of individual banks
and exchanges, however these tasks are now the FSA's
responsibility. Other activities used by the bank to
maintain financial stability include acting as the
banker's bank and issuing notes and coins.
Most of these operations are
conducted by the executive team, which includes the
executive directors of the bank and their
subordinates. The governor and the deputy governors
are also part of the executive team and supervise
the executive directors. Only two executive
directors serve on the MPC. Additionally, the bank
has a Court of Directors consisting of the governor,
two deputy governors, and 16 non-executive board
directors. The non-executive directors are appointed
by the Crown to a term of three years. The Court's
main function is to ensure that the bank runs
smoothly and efficiently. The bank is reviewed and
monitored by NedCo, a sub-committee consisting of
all the non-executive directors.
Current Governor: Mervyn A. King
Mervyn Allister
King succeeded Sir Eddie George as the Governor of
the Bank of England on June 30, 2003. He grew up in
the small city of Wolverhampton and is an avid fan
of the nearby soccer (football) team Aston Villa.
Considered by many to be an academic and a
phenomenal economist, he studied at Kings College,
Cambridge and Harvard University. He also taught at
the London School of Economics, MIT, and Harvard
among other universities.
Mr. King joined the BOE in 1991
and played a key role in transforming Britain's
monetary policy after the 'Black Wednesday' of
September 1992. This refers to the extreme
devaluation of the pound caused by George Soros, and
which earned Soros the moniker "the man who broke
the Bank of England." The Bank of England had been
artificially maintaining their exchange rate with
the Deutschmark despite the fact that the pound was
overvalued. They did this because they were members
of Europe's exchange rate mechanism ("ERM"), whose
goal was to maintain a tight trading band between
the many European countries' exchange rates.
However, as the U.K's economy worsened and Germany's
improved, the Pound became overvalued and the BOE
was forced to intercede in order to maintain the
rate. Soros and many other investors took advantage
of intervention and placed enormous selling pressure
on the Pound and the Bank of England was forced to
accept a devalued Pound, earning Soros billions. As
a result of 'Black Wednesday', the United Kingdom
was promptly kicked out of the ERM, ultimately
leading to the current system of a floating currency
and an inflation target set by the government for
the bank to meet by influencing interest rates.
Around that time, the United
Kingdom's inflation rate and unemployment level were
the highest among the G-7 members. However, since
then it has been an entirely different story. The
economy that Mr. King inherited from Sir George (Mr.
King was his deputy governor) in 2003 was healthy
and flush from over 40 straight quarters of GDP
growth. The U.K. had the lowest unemployment rate
among the G-8 nations and was one of the only large
economies to avoid a recession in the early 21st
century. Unfortunately, the future of the economy
was not as bright, as sluggish economic data began
to emerge from nearly every sector. Eventually in
August 2005, the MPC decided to cut the interest
rate for the first time in six years to the current
4.50% in order to stimulate the economy.
One of the main concerns about the
appointment of Mr. King as governor was his strong
personality. During Sir George's administration he
often disagreed with the other members of the MPC
and was frequently on the losing side of votes. Many
people felt that as governor this could potentially
be disastrous and the bank would become ineffective.
Since taking over as governor he has eased those
fears and for the most part has managed the bank
efficiently. Another concern about Mr. King becoming
governor was that his stance on the U.K. adopting
the Euro might create undue tension with the
government. Prime Minister Tony Blair has indicated
that he would eventually like to adopt the currency
and Mr. King is generally perceived as opposing the
move. As of today the U.K. has still not adopted the
Euro and Mr. King's beliefs have not been an issue.
Recently, tension has sparked
between the Bank and the government regarding the
appointment of members to the MPC.
While officially the Governor
and the two deputy governors are appointed by the
Crown, in reality it is the Chancellor of the
Exchequer who makes the decision. Therefore, the
Chancellor essentially controls seven out of the
nine appointments (the governors and the four
outside members) and the Bank would prefer more
input in the selection of its candidates.
Overall, the bank's relationship with the
government is strong and Mr. King has continued the
legacy of excellence at the bank despite the slowing
economy. Regardless of his many critics, he has
gained world-wide respect by demonstrating a savvy
understanding of the economy and as a result the
Bank of England remains one of the most respected
central banks in the world.
