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YOUR MONEY WHAT THE BANK DOES YOUR MONEY WHAT THE BANK DOES The Bank of England is the central bank of the United Kingdom. It’s not like a bank in your local high street that grants personal loans or mortgages. It has special functions that help keep the economy and financial system stable. These postcards pick out ten key topics to explain the work of the Bank of England. • History of the Bank of England – The Old Lady • Banknotes and the promise to pay • Banknotes and security features • Inflation and the value of your money • Interest rates and the Monetary Policy Committee (MPC) • Quantitative easing (QE) – injecting money into the economy • Forward guidance • The financial system • Financial Policy Committee (FPC) • Prudential Regulation Authority (PRA) • What happens when a bank fails? • Storing gold Low inflation, trust in banknotes and a stable financial system are important ingredients for a healthy and successful economy. HISTORY OF THE BANK OF ENGLAND – THE OLD LADY Your money – what the Bank does History of the Bank of England – The Old Lady The Bank of England was founded in 1694 to raise funds for the 1694 government during a time of war with France. Thereafter the Bank gradually assumed the role of the nation’s central bank. It was privately owned until 1946, when it was nationalised. 1734 The Bank moved to Threadneedle Street in 1734. Its famous nickname comes from a James Gillray cartoon published in 1797. Over two centuries later, the Bank is still known as The Old Lady of Threadneedle Street. 1920s-30s During the 1920s and 1930s the Bank was rebuilt. Work was completed just before the outbreak of World War II and survived bombing during the Blitz. 1997 The Bank was given operational responsibility for monetary policy in 1997. www.bankofengland.co.uk 2013 A Financial Policy Committee was established in 2013 to respond to risks across the financial system. In the same year, the Prudential Regulation Authority was created as a part of the Bank of England to keep banks and insurers safe and sound. BANKNOTES AND THE PROMISE TO PAY Your money – what the Bank does Banknotes and the promise to pay The Bank of England has been issuing banknotes for over 300 years. Banknotes were initially IOUs for gold deposited at the Bank. People used these notes to pay for things, knowing they were backed by ‘The Promise’ to pay the equivalent value in gold. That’s no longer possible. So what gives modern banknotes their face value, when they cost only a few pence to make? In a word, TRUST We trust that banknotes can be exchanged for the things we want to buy. We trust ‘The Promise’ that they will be accepted by others for their face value. This trust gives banknotes their value. www.bankofengland.co.uk BANKNOTES AND SECURITY FEATURES Your money – what the Bank does Banknotes and security features HM The Queen features on the front of Bank of England notes. The reverse side has images of eminent British people. Fake notes could undermine confidence in the real thing, so it’s the Bank’s job to make life difficult for counterfeiters. There are four denominations of Bank of England note: £5, £10, £20 and £50. Each has its own design, and larger value notes are bigger in size. £5 £10 £20 £50 There are almost three billion Bank of England notes in circulation. Counterfeit notes are very rare. They are also completely worthless. Genuine banknotes are very difficult to copy. They have a range of security features including holograms, watermarks, metallic threads and raised print. Bank of England notes are printed on special materials that are hard wearing with a unique feel. www.bankofengland.co.uk INFLATION AND THE VALUE OF YOUR MONEY Your money – what the Bank does Inflation and the value of your money Inflation is about rising prices. It’s the Bank of England’s job to preserve the value of your money by keeping inflation low. The prices of individual products rise and fall all the time. Inflation occurs when the prices of goods and services generally are rising. If the prices of most goods and services are rising, the value of your money falls. Your money buys less. The Th rate t att which hi h prices i are rising reflects the amount of spending in the economy compared with what can be produced, and the pressure this puts on company costs and prices. If spending increases too quickly, prices will tend to rise. Inflation in Britain has averaged about www.bankofengland.co.uk 2% since 1997. MPC INTEREST RATES AND THE MONETARY POLICY COMMITTEE (MPC) Your money – what the Bank does Interest rates and the Monetary Policy Committee (MPC) The Bank of England’s MPC meets regularly to set interest rates to hit the Government’s 2% inflation target. The MPC is made up of nine experts. Five are senior Bank of England staff and four are external members appointed by the Chancellor. Each has a vote to decide what interest rate to set. 2% If inflation looks set to go above target, the MPC will probably increase interest rates. It takes about two years for a change in interest rates to have its full effect on inflation. So the MPC sets interest rates based on its forecast for inflation two to three years ahead. Bank members MPC External members People will tend to spend less and save a bit more, putting downward pressure on inflation. www.bankofengland.co.uk If inflation looks likely to fall below target, the MPC will probably cut interest rates to stimulate spending and inflation. QE £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ QUANTITATIVE EASING (QE) – INJECTING MONEY INTO THE ECONOMY Your money – what the Bank does Quantitative Easing (QE) – injecting money into the economy If interest rates are very low and the Bank’s Monetary Policy Committee expects inflation to fall below the Government’s 2% target, it can inject money directly into the economy to boost spending. This is quantitative easing. If inflation looks like being too high, the Bank of England can sell these assets to reduce the amount of money and spending in the economy. www.bankofengland.co.uk The Bank of England creates new money electronically to buy financial assets like government bonds. This cash injection lowers the cost of borrowing and boosts asset prices to support spending and get inflation back to target. The Monetary Policy Committee continues to set interest rates, and the objective of monetary policy is unchanged – to meet the Government’s 2% inflation target. Quantitative easing was first used in the UK in March 2009. £ £ £ £ £ £ E MO NE M TE £ P OL I C Y CO M IT £ T Y AR £ IN FL ATI ON G TA R ET £ £ £ FORWARD GUIDANCE £ Your money – what the Bank does Forward guidance Forward guidance is one of the tools the Bank of England’s Monetary Policy Committee (MPC) can use to hit the Government’s 2% inflation target. It’s designed to help people understand how the MPC sets interest rates. This means households and businesses can plan their spending and investment with more confidence. Forward guidance was first used in August 2013. The MPC said it would leave interest rates unchanged at 0.5% at least until the unemployment rate had fallen to 7%, provided there weren’t risks to inflation or financial stability. Forward guidance can evolve. By February 2014, unemployment had fallen close to 7%. The MPC said there remained room for growth in the economy before raising interest rates. And, when they come, increases in interest rates are likely to be gradual and limited. www.bankofengland.co.uk INSURERS PENSION FUNDS HIGH STREET BANKS PENSION FUNDS CREDIT UNIONS INVESTMENT BANKS BUILDING SOCIETIES HEDGE FUNDS ASSET MANAGERS BUILDING SOCIETIES THE FINANCIAL SYSTEM Your money – what the Bank does The financial system The financial system is central to the working of the economy and modern life. It includes high street banks, building societies and insurers. There are many other parts including pension funds, asset managers, investment banks, credit unions and hedge funds. Each day the financial system handles millions of transactions allowing us to make payments in the shops and online, settle bills and receive our wages and benefits. The financial system performs two other vital tasks. It connects those who have money to save with those who need to borrow money – be it for a mortgage or a business loan. And it allows people to insure against the risks they face in their businesses or daily lives. www.bankofengland.co.uk A healthy and stable financial system will deliver these key services in good times and bad. FI L A CI AN N CY LI PO E TE IT M M CO INSU RERS PEN FUN SION DS CRED UNIO IT NS H FUNEDGE DS INVE BANSTMENT KS SO INSU RERS FINANCIAL POLICY COMMITTEE (FPC) Your money – what the Bank does Financial Policy Committee (FPC) The Bank of England’s FPC looks out for risks and weaknesses across the financial system. A healthy financial system is a key part of a successful economy. Bank members FPC The FPC consists of thirteen experts. Six are senior Bank staff and the others are external members appointed by the Chancellor. The FPC meets at least quarterly and publishes its Financial Stability Report twice a year. The Report sets out its assessment of risks and weaknesses in the financial system and the measures it is taking to address them. External members If risks are increasing, the FPC might ask banks to raise more money from shareholders as a buffer in case things go wrong. www.bankofengland.co.uk The FPC makes decisions based on consensus. If a consensus cannot be found, members of the FPC can vote to reach a decision. BANKS • BUILD LDI DIING NG SOC CIIET TIES • CR CREDIT UNIONS NS • INSUR INSURERS ERS S • IN INVESTMENT FIRMS PRUDENTIAL REGULATION AUTHORITY (PRA) Your money – what the Bank does Prudential Regulation Authority (PRA) The PRA focuses on the harm that financial firms can cause to the stability of the UK financial system. A healthy and stable financial system is one in which firms continue to provide key financial services in good times and bad. Those institutions and issues posing the greatest risk to the financial system are the focus of the PRA’s work. BANKS BUILDING SOCIETIES www.bankofengland.co.uk INSURERS The PRA is part of the Bank of England. It regulates around 1,700 banks, building societies, credit unions, insurers and major investment firms. The PRA has two objectives. To promote the safety and soundness of these firms and, for insurers, to secure protection for policyholders. It also has a secondary objective to facilitate effective competition. Bank members Prudential Regulation Committee External members The Prudential Regulation Committee meets regularly to make important decisions on the regulation of financial firms. The Committee comprises five senior Bank staff and seven external members. AI AI NT N I N G V I TA L S E R V IC S ES OPS • M M AK N SH I IN NG G DI AN N D PE • RE TS CE M AY E NG S NT L O A N S • PAY I • O N L I N E PAY M ING EN IV BI L P LS WIT H D R AWA L S NG CUS SH • S EC TI CA AL A OT E TO M • RY PR RS WHAT HAPPENS WHEN A BANK FAILS? Your money – what the Bank does What happens when a bank fails? Each day banks handle millions of transactions for their customers. These include our spending in shops, paying bills, salary payments and withdrawing cash. Our everyday lives would soon grind to a halt if the failure of one of our large banks meant these transactions could not be made. If a bank gets into serious financial difficulties, the Bank of England can step in to ensure vital services are kept running, customers are protected and there is no knock-on disruption to other banks. This means that customers will be able to access their money and make their payments as normal. www.bankofengland.co.uk Taxpayers should not pick up the cost for dealing with a failure and bosses of the failed bank will be held accountable and can be replaced. STORING GOLD Your money – what the Bank does Storing gold The average gold bar weighs 400 fine ounces. That’s around 13 kilos or 28 pounds. The Bank of England is one of the largest custodians of gold in the world, with around 400,000 gold bars stored in its vaults. It provides safe keeping for the country’s gold reserves and overseas central banks. The Bank has very little gold of its own. Gold plays no role in the Bank’s monetary or financial policy. When gold bars are delivered to the Bank they are weighed and checked before being taken for safe keeping in one of the Bank’s gold vaults. No gold has ever been stolen from the Bank! Gold is stacked on pallets four high in the Bank’s vaults. A fully-loaded pallet can hold up to 80 bars and weighs one tonne. www.bankofengland.co.uk YOUR MONEY WHAT THE BANK DOES The Bank of England has a Museum that tells the story of the Bank from its foundation in 1694 to its role today as the nation’s central bank that sets interest rates and keeps the financial system stable. Opening hours Monday – Friday: 10.00am – 5.00pm (last entry 4.30pm) Closed at weekends and Public Bank Holidays Admission is Free Address Bank of England Museum Bartholomew Lane London EC2R 8AH Tel: 020 7601 5545 Email: [email protected] Web: www.bankofengland.co.uk/education/pages/museum/visiting If you have any questions or enquiries about the Bank of England, you can email us at: [email protected] Or write to: Public Information & Enquiries Group Bank of England Threadneedle Street London EC2R 8AH You can telephone the Bank’s public enquiries team on 020 7601 4878