The Bank of England acquired interest rate setting powers in 1998. In May 1997, the then newly appointed Chancellor of the Exchequer, Gordon Brown, announced that the labor government was giving the Bank of England operational responsibility for setting interest rates. The Bank of England Act of 1998 was implemented on June 1^st, 1998. Control of monetary policy now resides with the Bank of England in its Monetary Policy Committee (MPC).

 

The Committee is composed of the Governor, two Deputy Governors, two Bank Executive Directors, and four experts appointed by the Chancellor. The MPC meets monthly (usually the first Wednesday and Thursday of the month) to determine interest rate policy. Unlike the Federal Reserve or the European Central Bank, the Bank of England has an established fixed inflation target of 2.0 percent. Mervyn King replaced Sir Edward George as governor on July 1, 2003. Mark Carney, the former governor of the Bank of Canada replaced King on July 1, 2013.

 

The Bank of England's primary goal is to contain inflation and it uses an inflation target to do so. Beginning with the January 2004 meeting, the Monetary Policy Committee is using the harmonized index of consumer prices for its inflation indicator and is called the CPI. Previously, the MPC used the retail price index excluding mortgage interest payments as its inflation indicator and a 2.5 percent inflation target. There has been a substantial spread between the two measures of inflation which can be traced to the way they are calculated. Among the key differences is the exclusion of council taxes and owner-occupied housing costs from the CPI. Arithmetic means are used to combine individual prices to construct the RPIX while geometric means that allow for substitution are used in calculation of the CPI. This formula differential accounts for nearly half of the difference in the two rates.

 

Interest rate decisions are announced immediately after their meetings. The meeting's minutes, including a record of any vote, are normally published two weeks following the meeting. The Bank is not entirely free from the Exchequer, but is assigned an inflation target in the Chancellor of the Exchequer's budget message.

 

 

The Bank's monetary policy objective is to deliver price stability (as defined by the Government's inflation target) and, without prejudice to that objective, to support the Government's economic policy, including its objectives for growth and employment. The Government's inflation target is confirmed in each Budget statement. The Bank publishes a quarterly Inflation Report, which spells out the Bank's forecasts and the thinking of committee members. Needless to say, market participants closely scrutinize the report.

 

The Bank of England had been waging an aggressive campaign against consumer price inflation and had pushed their key interest rate to 5.75 percent. And until the credit crunch, more interest rate increases were anticipated to quell inflation. However, the credit crunch, subprime mess and sinking growth have forced the BoE to change direction. The Monetary Policy Committee lowered the key interest rate by 25 basis points at both the January and February 2008 meetings and then again in April. However, given inflationary pressures, MPC members kept their key interest rate unchanged at 5 percent. The BoE lowered the key interest rate on October 8, 2008 in the coordinated rate reduction with other central banks including the Federal Reserve, the ECB and the Bank of Canada among others.

 

Since October 2008, the Bank has chopped 400 basis points from the key rate, reaching a low of 0.5 percent in March 2009 where it has remained. MPC members cut their policy rate by 150 basis points in November and another 100 basis points in December of 2008. When the interest rate reached 2 percent, the Bank was at the lowest level since 1951 and at the same time, equaled its lowest rate since the Bank was founded in 1694.

 

The BoE adopted quantitative easing in order to lower interest rates by flooding the market with funds through the purchase of gilts — government bonds. The initial goal was to purchase £75 billion, but at the May meeting, the amount was increased to £125 billion, to £175 billion in August and £200 billion in November 2009. At its October 2011 meeting, the MPC increased the program's ceiling to £275 billion. It increased its ceiling to £325 billion in February, 2012 and again in July by £50 billion to £375 billion.

 

As part of the annual budget announcement in March 2013, Chancellor of the Exchequer George Osborne announced a relatively subtle, but potentially important, change to the BoE's monetary policy remit. The 2.0 percent medium term CPI inflation target remains but its interpretation will be more flexible according to the state of the economy. The new remit will acknowledge that unconventional policy instruments may be necessary to support the real economy while keeping inflation under control. This might be seen as increasing the likelihood of policy being kept looser for longer, particularly during periods of clear excess capacity. The new framework will also put the onus on the MPC to provide, when deemed appropriate, explicit forward guidance on policy, including intermediate thresholds, in order to influence the future path of interest rate rates. At the same time, communication between the Bank and the Treasury will be made more transparent. Thus, the BoE Governor will now be required to write his open letter when inflation is above target on the day that the minutes of the next MPC meeting are published instead of the same day that the official data are released. The intention is to allow a more substantive exchange of views.

 

In its first Inflation Report under its chairman Mark Carney, the MPC adopted forward guidance using the labour force survey jobless rate as its threshold. It said it would not tighten monetary policy until the labour force survey jobless rate was 7 percent. However, the ILO unemployment rate declined at a faster pace than expected at that time and is currently 5.5 percent for the three months ending in July 2015. The BoE discarded this as a monetary policy trigger after its more than expected rapid decline.

 

The Bank's latest Quarterly Inflation Report (QIR) shows CPI inflation creeping higher but, at only 1 percent, still well below its 2 percent medium term target in the first quarter of 2016. Thereafter, it is seen rising to 2.0 percent in two years' time and to 2.14 percent by the third quarter of 2018. The underlying assumptions include the Bank Rate increasing from 0.5 percent presently to 0.7 percent in the second quarter of 2016 before moving up to 1.2 percent in the first quarter of 2017 and 1.7 percent three years ahead. In other words, the current policy stance is essentially seemed appropriate to ensure the attainment of the Bank's price stability goals. More generally, the MPC expects UK growth to slow but remain firm on the back of rising real incomes and improving productivity. The overall picture should be seen positively by international investors which, much to the chagrin of the BoE argues in favor of a sustained overvaluation of the pound.

 

The Bank of England has maintained its key interest rate at 0.5 percent at its monthly meetings, where it has been since March 2009. Its asset purchase program ceiling is £375 billion. It has been at this level since July 2012.

 

On December 11, 2014, BoE Chairman Mark Carney announced a change in the timing of both future monetary policy committee meetings and the release of minutes and the Quarterly Inflation Report (QIR). Beginning in 2016, the BoE will no longer meet monthly, but will meet every six weeks. The European Central Bank moved to meetings every six weeks in 2015.

 

In August 2015, the minutes of the MPC meetings were released simultaneously with its monetary policy announcement rather than two weeks later as had been the policy. At the same time, the QIR that provides the economic platform upon which the policy decisions are made was also be released alongside the policy announcement rather than a week later. However, full transcripts of the MPC's meetings will only be made available with an 8-year lag as of the March 2015. There was no change in policy at the September MPC meeting.