Philosophy and Financial Autonomy of the Bank of England

Philosophyand Financial Autonomy of the Bank of England

Philosophyand Financial Autonomy of the Bank of England (BoE)

Statedgoals and philosophy

The Bank ofEngland enjoys monopoly on the monetary operations of United Kingdomthus, it manages the nation’s money supply, interest rates, andcurrency. As the country’s central reserve, the BoE promotes thewelfare of United Kingdom’s people by issuing currency notes inWales and England and maintaining financial balance. Its goal is toprovide solid prices and assurance in the country’s currency.Through its Monetary Policy Committee (MPC) it intends to attainconfidence and stable charges on goods by setting interest rates andachieving an inflation rate of 2% (Bank of England, 2016b). The pricebalance and liquidity objectives are aligned with its support of thegovernment’s economic goals including employment and growthobjectives. In ensuring pecuniary policies, the Bank of England,makes sure that financial structures and sectors run smoothly andpeople gain confidence in the system (Bridges, Cloyne, Thomas, &ampTuckett, 2016). Its Financial Policy Committee (FPC) removes ordiminishes weaknesses and risks in the country’s commercial system(Bank of England, 2016b). On the other hand, its PrudentialRegulation Authority (PRA) supervises and regulates credit unions,commercial banks, insurers, building societies, and investment firms.To sustain its effectiveness and authority in accomplishing itsresponsibilities, it is imperative that the institution retainswidespread support and confidence through discretion, integrity,efficiency, and vigilance (Bank of England, 2015). Therefore, the itsphilosophy is to create self-reliance and offer leadership tofinancial markets, as well as, set standards of professional andethical conduct for institutions to follow.

Thelevel of autonomy enjoyed by the Bank of England

The notion that central reserves should be autonomous from partisansway has deep historical background and featured in the deliberationsleading to the formation of many modern federal reserves. Thus,majority of economists and policymakers recommended the delegation ofa country’s economic policies to an independent centralizedinstitution with an effective internal system and constitution(Goodhart, 2016). Most scholars agree that the independence offederal banks denote the lack of prescribed mechanism by a governmentto influence the choices of the establishment over regulatorypolicies. It is imperative to note that the organization enjoyscomplete autonomy in steering the nation’s cash plans. However, thetreasury can tacitly or openly grant discretion to the institute onmatters relating to managerial freedom and deployment of resources.For example, section 4(1) of the bank’s act of 1997 provides thetreasury with the authority to give directions to the reserve onaspects of a policy. Thus, it is a self-governing public organizationsince 1997 (Bank of England, 2016b Burnham, 2016).

Financialtools utilized by the Bank of England

The BoE’s maingoals are monetary stability and asset purchase facility. Budgetaryor cash constancy concerns with steady fees and confidence in thecurrency. The BoE ensures the implementation of these strategiesthrough the MPC, which sets interest rates in a bid to meet the itstargets on the fees charged on goods. The commission formulates theeconomic policies by setting the rate (Bank of England Base Rate)at which it lends to other financial institutions. The setting of therate is predominantly to stabilize the fees of goods and services(Bank of England, 2016a). Furthermore, the committee supports thecountry’s economic policies and guarantees a greater liquidity infinancial markets. The agency ensures increased liquidity by offeringasset purchase facility commonly conducted through quantitativeeasing (QE). This refers to the addition of money straight into theeconomy, for example, by buying government bonds or debts issued byprivate firms. The institute discusses QE as an alternative form offiscal guideline where it creates cash by electronic means to buyfinancial assets with the intention of increasing private sectorspending in the economy and regulating inflation (Bank of England,2016a). In 2013, the governor issued the MPC forward guidance as atool for regulating future deflation or great price increases. Theguidance is designed to maintain the present highly stimulativestandpoint of strategies until the organization has reduced trade orindustry stagnation or relaxation. Moreover, through the guidance, itwill not reduce its rate of 0.5% until the unemployment rate asmeasured by the Labor Force Survey reduces to 7%. Other thancontrolling policies aligned to the state’s money, the institutionalso regulates and supervises insurance and investment sectorsthrough FPC (Financial Policy Committee).

Economicimpact of the bank’s policies

As the soleinstitution of maintaining policies related to money supply andliquidity, the BoE influences the growth and development of UnitedKingdom. The reserve’s role of monetary stability impacts on thelevels of aggregate demand and consumer spending since reducing orincreasing interest rates determines the level of money in supply.Furthermore, the regulation of the interest rates keeps the rate ofinflation within the consumer price index of 2% +/-1, whichinfluences the country’s economic strength and unemployment. Theutilization of quantitative easing allows the BoE to create moneyelectronically, which increases the amount of currency in supply andinhibits deflationary pressures. All these fiscal policies stimulatethe economy, increase consumer confidence, inhibit unemployment, andregulate prices. For example, according to Bray (2016), the MPC votedsolidly to decrease its standard interest rate from 0.5 to 0.25 afterthe country’s resolution to leave the EU. The decision was intendedto stimulate consumer assurance and purchasing management sentiment,as well as, increase service output after stocks in many sectorsplummeted and the pound fell sharply. Bray (2016) asserts that theestablishment also decided to buy an additional US$80 billion inassets and US$14 billon in investment grade corporate bonds tostimulate the economy.

Challengesfacing the bank

Although it hasincreased its influence on effective strategies over the years, itlacks the tools to balance prudential oversight and economicmanagement (Giese, Nelson, Tanaka, &amp Tarashev, 2013). The BoE hascreated a lot of money through quantitative easing, but the GDP isyet to fully recover from the pre-crisis level of 2009 (Bean, 2015Giese et al., 2013). This means that the BoE’s main challenge isthe success of its numerous approaches in regulating money supply,such as, interest rates and forward guidance. These instruments havehelped the institution attain some regulations in the economy, butthey have not entirely helped in stabilizing industries and markets.For instance, after the country’s decision to leave the EU, thepound decreased severely and shares of most firms dropped, whichmeant the intervention of the institute to counter these impacts.However, despite the MPC agreeing to reduce the interest rate andincrease quantitative easing, the economy is yet to experience anypositive effect (Bridges et al., 2016). It is also significant tonote that its main goal of increasing interest rates to inhibitinflation does not necessarily result to a positive aspect since thereduction leads to a fall in economic growth. Bean (2015) assertsthat the Bank of England has increased its monetary measures, but itcontinues to experience weak productivity growth because of marketexternalities, impaired capital allocation, and labor hoarding. Thismeans that the BoE faces low productivity growth and imbalances,which have been heightened by the Brexit issue.

Recommendationson enhancing policies and operations

The BoE remains a fundamental organization to the pursuance ofemployment, inflation, and price balance in the country. Theorganization’s policy-making process has been successful, but itneeds to develop more measures to improve its operations. Majority ofpeople feel that the BoE is too hierarchical and out of touch withthe people thus, it needs to fix this culture and develop anorganizational culture, which greatly involves the people (Goodhart,2016). As an autonomous organization, the institution feels that itspower should be untrammeled, a notion that at times has resulted todiminished radical changes. A survey conducted by the bank shows thatless than 50% of households are satisfied with its operations, whichillustrates the need to change its inward structure to create agreater confidence among the people (Bank of England, 2015). Theinward restructuring should be supported by increased governance andservice-delivery (Goodhart, 2016). The institute can ensure controlreforms and effective regulation by initiating comprehensivecommunication and technological systems in all its departments. Thisallows it to regulate its effectiveness in regulating financial andinsurance firms. Furthermore, it should ensure that its strategicplan match its vision, philosophy, and expected outcomes. It canachieve this by creating an accountable context for change managementand institutional incentives. Additionally, the creation of aninfluential framework can be enhanced by leveraging modernizations inbusiness instruments and building on programs learned to supportbusiness lines. The bank should support these contexts by enhancingits communication with the government through political economyscrutiny and acclimatizing governance pointers to project outcomesagendas.

References

Bank of England. (2015). Bank of England staff handbook. Bankof England. Retrieved 5 September 2016 fromhttp://www.bankofengland.co.uk/about/Documents/humanresources/equal-opportunities.pdf

Bank of England. (2016a) Bank of England monetary policy. Bankof England. Retrieved 5 September 2016 fromhttp://www.bankofengland.co.uk/monetarypolicy/Pages/default.aspx

Bank of England. (2016b). What does the Bank of England do?Bank of England. Retrieved 5 September 2016 fromhttp://www.bankofengland.co.uk/about/Pages/onemission/default.aspx

Bean, C. (2015). Macroeconomic challenges facing Europe.Systemic Risk Center.

Bray, C. (2016). Growth worries lead Bank of England to cut rate tohistoric low. New York Times, B4

Bridges, J., Cloyne, J., Thomas, R., &amp Tuckett, A. (2016). TheAnalysis of money and credit during the financial crisis: Theapproach at the Bank of England. In&nbspMonetary Analysis atCentral Banks&nbsp(pp. 21-51). Palgrave Macmillan UK.

Burnham, P. (2016). The alternative externalization strategy,operational independence and the Bank of England.&nbspParliamentaryAffairs, gsw017.

Giese, J., Nelson, B., Tanaka, M., &amp Tarashev, N.(2013).&nbspFinancial Stability Paper No 21: How couldmacroprudential policy affect financial system resilience and credit?Lessons from the literature&nbsp(No. 21). Bank of England.

Goodhart, C. A. (2016). Bank of England. In&nbspBankingCrises&nbsp(pp. 5-17). Palgrave Macmillan UK.