The Function of the Bank of England

1. It issues notes and coins. The Bank of England is theinflation target the MPC meet every month and
sole issuer of notes and coins in the UK. In theory youexamine future inflation trends. If inflation looks to be
could take a £10 note to the Bank of Englandincreasing then they will vote to increase interest rates
and ask for you equivalent sum of Gold. I don't knowin order to dampen demand. They don't directly set
whether they would take kindly to such requests but inmortgage rates but indirectly they do influence
theory that is how they maintain confidence in notesmortgages through the setting of interest rates.
and coins as a medium of exchange4. The Bank of England actually set the base rate of
2. Managing the government's debt. National Debt in"repo" rate. This is a rate at which they lend to the
the UK At the end of 2005/6 general governmentcommercial banks. They keep the banks short of
debt was £529.1 billion, equivalent to 42.1 perliquidity so that they often have to borrow on this repo
cent of GDP. [1]rate. If this repo rate changes then the commercial
To manage the government debt the bank of Englandbanks usually pass the changes on to their customers
sell bonds and gilts to the private sector. Usually bondsby changing there own interest rates.
have a lifetime of about 30 years. In order to5.. Acting as lender of last resort. If the commercial
encourage people to buy government debt they needbanks are short of cash then they go to the Bank of
to offer an attractive interest rate. Interest paymentsEngland who will be able and willing to lend them
on UK debt amount to nearly £30 billion a yearmoney. This is important for the banking system
3. Managing Monetary Policy. In particular the MPCbecause it ensures the banks are never short of cash
Monetary Policy Committee is responsible for changingand so people have confidence in the banking system.
interest rates in order to keep inflation within the6.
governments target of CPI 2% +/-1. To achieve this