The Bank of England and the European Central Bank

FNCE 4070Financial Markets and Institutions

Bank of England

• King William and Queen Mary founded the bank in 1688.

• The bank started with an initial loan of 1.2m GBP to the government– Thus it was privately owned and operated until

1946 when it was nationalized• It managed the government’s accounts and

finances• It was a commercial bank

Bank of England

• Prior to 1997 the bank was one of the least independent of central banks

• In May 1997 a Labour government came to power.– The inflation fighting credentials of the labour

party were less than those of the conservative party.

Instrument Independence

• The Chancellor of the Exchequer, Gordon Brown, made a surprise announcement– The Bank of England would be given the power to

set interest rates.– The government can still overrule the Bank and

set rates in• Extreme economic circumstances and• For limited period

Core Purposes

• Monetary stability– This means stable prices and confidence in the currency.

Stable prices are defined by the Government’s inflation target

– The current inflation target is 2%• Financial stability– detecting and reducing threats to the financial system as

a whole. • lender of last resort, • oversight of key infrastructure and• surveillance and policy roles

Monetary Policy Committee (MPC)

• Chaired by the Governor of the Bank of England– Sir Mervyn King (2003-present)

• Includes 5 full-time Bank executives• Includes 4 external members who are

appointed by the Chancellor of the Exchequer for 3 year terms.

The European System of Central Banks (ESCB)

The Eurosystem

Price Stability

Governing Council – Price Stability

ECB Independence