Bank of England

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.

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 has been waging an aggressive campaign against consumer price inflation and has pushed their key interest rate to 5.75 percent. And until the credit crunch, more increases were anticipated to quell inflation. The CPI was at the 2 percent inflation target level in October after three months below that level, it remains to be seen whether this was the start of a trend towards lower prices. However, the latest labor market data indicate that there is virtually no slack there.