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How Does The Bank Of England Dictate Interest Rates In The Uk


             The 1998 Bank of England Act which officially gives the operational responsibility for setting short-term interest rates to the Bank of England provides the current framework for monetary policy. Decisions on interest rates are normally made by the Monetary Policy Committee (MPC) of the central bank, which was established by the 1998 Bank of England Act. The MPC consists of the Governor and the two Deputy Governors of the Bank Of England, two members appointed by the Bank after consultation with the Chancellor, and four members appointed by the Chancellor. The MPC meets monthly and decisions are announced immediately after the meeting.
             When the central bank operates in the domestic money market the main instrument of monetary policy is the short-term interest rates. The central bank has many techniques for influencing interest rates but they are all designed in one way or another to affect the cost of money to the banking system. This is done by keeping the banking system short of money and then lending the banks the money they need at an interest rate which the central bank decides. In the UK such influence is exercised through the Bank of England's daily operations in the money market.
             The Bank of England is banker to the UK banking system. Transactions between commercial banks are finally settled between accounts held at the Bank of England by banks, which are members of the wholesale clearing systems. These settlement banks are expected to hold positive balances on their accounts at the Bank of England each day. The commercial banks total funds are changed by transactions between themselves and the Bank of England, and between themselves and the Government accounts at the Bank of England. Transactions between banks simply redistribute funds between themselves, it can be thought of as a financial cycle. Payments from the private sector to the government are finally settled by a transfer of funds between the settlement banks accounts at the Bank of England and the Governments accounts.


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