The Bank of England was originally established as a private bank that served in a banking capacity for the government. Its primary purpose in being established was to raise money for the war effort against France. Both the King and Queen of the land at the time were early shareholders in the company.
The Bank of England first started conducting business on August 1, 1694, in the Mercers’ Hall on Cheapside, which was just a temporary location at the time. There were only 17 clerks and two gatekeepers working there at any given time. Now, it is the central and biggest bank in England and employees thousands of people and serves millions.
Historical Events That Created the BOE
The Bank of England has played a major role in serving the United Kingdom throughout history since it was established. Let’s look at some of its major milestones over the years which led to the creation of this central bank that we know today. They are as follows:
UK Crash Out of The ERM
In 1990, the UK became a member of the ERM. However, as a result of massive increases in interest rates and intervention in the foreign exchange markets, which both failed to move sterling from the floor of the ERM, the government made the decision to withdraw, as it was deemed that the cost of attempting to keep it within the boundaries would be too expensive. This decision came as a result of the failure to move sterling from the floor of the ERM. “Black Wednesday” was the name given to the subsequent collapse of the financial system. It was predicted that it would cost more than three billion pounds to HM Treasury.
Nationalization of the BOE
The Board of Elections has, since the beginning of its organization, seen itself as a public institution. Even though the Bank was privately held for a significant portion of its history, the actions of the bank were controlled by the government. When the Bank was nationalized in 1946, it meant that the government took ownership of it rather than the private investors who had previously held that ownership. This granted the government the authority to nominate governors and directors of the Bank, as well as the ability to provide the Bank with instructions.
Wartime Banknote Forgeries
During the course of the war, the Nazis distributed counterfeit £5 notes across Britain in an effort to undermine the stability of the British currency. The Sachsenhausen concentration camp, which was located outside of Berlin, was the location where these fake notes were produced. The Nazis issued over 9 million notes with a face value of 134 million pounds; this sum represented more than 10 percent of the total banknotes that were circulating at the time in the UK.
An expert on banknotes at the Bank of England classified them as the most hazardous ones they had ever seen at the time. The emergency efforts that were made to slow this process included the introduction of the special blue £1 note in 1940. This was the first time that a metallic thread was utilized in one of their banknotes. Because of the risk of counterfeiting, they put a temporary halt on the issuance of denominations bigger than five pounds in the year 1943.
Role of the Bank of England
Most of us actually don’t realize how big of a role these financial institutions play in the world. They are responsible for the economic conditions of their respective countries and the people depend on them to not cause the country to go into default or economic recession. Similarly, the Bank of England also plays a major role in the current economic situation in the country. This is because of the following reasons:
Monetary Policies
The Bank of England consistently releases monetary policies in accordance with the current financial situation in the country. The Monetary Policy Committee (MPC), which consists of nine members, is responsible for determining the policy regarding interest rates. The Governor of the Bank of England maintains control over the Monetary Policy Committee (MPC), which is a position held by a member of the public who is also employed by the Bank of England in a professional capacity. In addition to the Bank of England’s top economist, the committee is comprised of the three deputy governors responsible for monetary policy, financial stability, and markets and policy respectively.
The Chancellor of the Exchequer is an important figure who is comparable to the Secretary of the Treasury in the United States and is the one who makes the appointments for the remaining four members of the committee. The Monetary Policy Committee gets together on a regular basis (eight times a year) to discuss whether or not the monetary policy should be altered in order to fulfill the inflation target set by the government. Every person on the committee has one vote, and reaching a decision that everyone agrees on is not necessary. The Bank of England is responsible for adjusting the bank rate which is also often known as the rate that is charged to domestic banks.
Inflation Control
Inflation is a major crisis that takes over several countries like a disease. It is just like the COVID-19 virus as it doesn’t stop in just one country, it takes over several countries all together. As always like in the past, whenever inflation took over a single country, most of the countries in the vicinity were impacted as well. This is because inflation occurs due to a major economic crisis. This type of crisis usually impacts more than one country simply because it has no choice. Trade routes are impacted and international flights become at a stand-still. A rate of inflation that is both low and stable is necessary for an economy to be considered healthy.
The annual percentage increase in general prices that should be allowed in the UK is predetermined by the government as the maximum allowable increase. The Bank of England is responsible for ensuring that inflation remains within the desired range. It would be beneficial to have a little bit of inflation. However, rates of inflation that are both high and erratic can be destructive. When prices are difficult to foresee, it is difficult for individuals to plan how much money they can spend, save, or invest in the future. In the worst-case scenario, severe and fluctuating inflation can bring about the collapse of an economy.
Economical Information
One of the best places to get information about the economic situation of any given country is from the central bank controlling the economic decisions of the country. This is because they are the ones making these decisions so you can only get the most accurate information from them. We really recommend you avoid getting this information from magazines and other non-financial site as they usually twist the words to exaggerate them for views and ratings. They are not a reliable source of information. Almost all central banks have a press release section where they release this information and it would be best to check this section regularly in order to be up to date on the economic situation of the country. If your central bank does not give out this information on their website it would be best to reach out to them to see where would be the best place to receive it instead.
Regulatory Reforms
Following the devastating effects of the global financial crisis in 2008, the United States government passed additional regulatory changes in 2012 as part of the Financial Services Act. As a result of taking these actions, the financial institution established a new division of the bank called the Prudential Regulation Authority as well as an independent body named the Financial Policy Committee, which was modeled after the MPC. In addition to this, the bank started to exercise supervision over suppliers of financial market technology such as central securities depositories and payment systems. If it weren’t for these regulatory reforms which are consistently being updated, the UK’s economy would still be following the third-world ways of handling money through cash only.
How the BOE Impacts the Pound Market
The Bank of England is directly responsible for impacting the pounds market in the forex industry. This is because the Pound is the national currency of the UK and the Bank of England is the central bank of the UK. Therefore, any major releases, statements, or updates from this national bank will have a big impact on the pound markets. And this has actually been seen happen on several occasions. Almost every time the BOE releases something important, it either causes the GBP markets to crash or skyrocket. Here are some of the most important things to look out for from the Bank of England:
Interest Rate Decisions
The Bank of England regularly updates its interest rates. This is especially the case if the country is going through major economic turmoil. You should know that every bank tries to keep its interest rates as low as possible. This is to prevent the economy from collapsing into a recession. However, there are situations where the bank has no choice but to increase its interest rates. This is especially true when the country is suffering majorly from an inflation crisis.
During such a crisis, the bank has no choice but to increase its interest rates in order to bring inflation under control. Whenever the Bank of England is set to release its interest rate decision, the Pound markets become super volatile. This is in anticipation of the decision to come. However, after the decision is made, the market can be very unpredictable. If the interest rate decision was positive, the Pound may enter bullish markets. However, if it was negative, the Pound may enter bearish markets.
Member Speeches
The Bank of England holds speeches as regularly as at least twice a week. This is to update the public on the current scenario in the financial work and how the BOE plans to fit into the discussion. Although anyone’s speech can be pretty important since you never know what could be revealed, the speeches of the president, chairman, and governors are a bit more important than the rest. It should be noted though that these influential members usually don’t reveal any key financial data that may be useful for us to navigate through the financial world. They usually like to stay neutral unless it is in the best interest of the country not to do so. These member speeches are crucial in determining the market movement of the Pound. If your economic calendar reveals a BOE member speech coming up, it’s best to play your cards wisely.
Statistical Releases
Aside from its regular releases of statements and monetary decisions, the Bank of England also occasionally releases some statistical data as well. I find this to be super useful in maintaining a trusting relationship with its stakeholders. Without the statistical data, we would just have to believe what they are saying in their speeches and we’d also have to believe their reasoning behind updating their monetary policies. This statistical data really helps put money where their mouth is and helps us understand why exactly each situation occurred and what the Bank of England did to impact this situation as well. If the statistical data reveals a positive scenario within the BOE, the GBP markets will most probably be bullish and be in bullish markets. However, if there is no press release. The market will adjust itself according to your weight.
Meeting Minutes
Usually a couple of days or weeks after making a big decision, the Bank of England releases their Meeting Minutes which is basically a recording of the discussion that took place between BOE members when they were deciding the decision that was to be made. This is super important in understanding who is on whose side and why exactly they made the decision that they did. Usually after the release of the interest rate or any other monetary policy decision, we get to hear the meeting minutes and it helps us understand their reasoning behind the decision they made. This has a big impact on the GBP markets. Depending on the result that was released, whether it was positive or negative, the GBP currency will become quite unstable.
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