in the UK. Decisions on interest rates are made by the Bank’s Monetary Policy
Committee (MPC). The Bank’s monetary policy objective is to deliver price stability as
defined by an inflation target set by the UK government. The MPC sets the short-term
interest rate in pounds sterling and implements this rate through open market
operations in the sterling money market. The Bank of England is therefore functionally
independent of the UK central government. (Although in fact there is provision in the
Act of Parliament for the British Chancellor of the Exchequer to issue directives on
interest rates in an emergency.)
Transactions between banks in the UK are settled through accounts held with the
Bank of England. The open market operations of the Bank of England ensure that the
commercial banks have enough funds available to settle all transactions. The Bank
lends funds against collateral consisting of high quality assets such as:
- Treasury bills;
- gilts (UK government bonds);
- certain eligible bank bills;
- securities issued by EU governments.
The rate of interest agreed in these transactions affects the overall level of interest rates
in the UK economy.
The Bank of England’s operations are conducted with a range of major financial
institutions such as banks, building societies (mortgage lenders) and securities houses.
Funds are lent with an average maturity of about two weeks. If the Bank believes that
there are surplus funds available in the banking system and wishes to reduce the
amount of money available for lending in the banking system, it can mop these up
through outright sales of UK Treasury bills.
Read More : Sterlings Money Markets
