3.1The Bank of England

The Bank of England is the UK’s central bank. At various times central banks are

responsible for some or all of the following:

l	the conduct of monetary policy;
l	banker to the commercial banking system;
l	banker to the government;
l	supervisor of the banking system;
l	manager of the national debt;
l	manager of the foreign exchange reserves;
l	issuer of the national currency.

In recent years, there has been a tendency towards giving central banks increased

independence in their conduct of monetary policy and a mandate which requires

them to focus on price stability ahead of all other objectives. Where this has happened

(as in New Zealand, Canada, Chile, Mexico, France and in the UK since 1997) it can

create conicts between the monetary policy and other roles. For example, a central

bank whose charter requires it to use every available monetary instrument to achieve

the single target of a low rate of ination will nd that it has to make frequent

changesto interest rates and sometimes push them to highlevels. The rst of these

causes bond prices to uctuate (see section 6.2.1), which may reduce the demand for

government bonds and make it difcult for the central bank to manage the national

debt as it would wish if it were also charged with that responsibility. The latter may

cause some bank borrowers to default, and a bank which already has some poorly

performing loans might be pushed into insolvency. If the central bank were also

responsible for supervising and maintaining stability of the banking system, it may

be reluctant to raise interest rates as required by monetary policy.

These potential conicts of interest explain why the more independent central

banks, charged with the conduct of a strict anti-inationary monetary policy, tend

notto have the full range of responsibilities listed above. (There is little point in

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3.1 The Bank of England

trying to make the central bank more powerful in its anti-ination role by making

it independent of government if it is still going to have other responsibilities which

interfere with the conduct of monetary policy.) They also explain why the supervisory

and debt management functions were removed from the Bank of England when it

became more independent in 1997.

In the rest of this section we shall look briey at each function and then, where

appropriate, explain the Bank of England’s current role.