The Bank of England is responsible for managing the monetary policy of the United Kingdom and maintaining the supply of money in its economy. The Bank of England is independent of the government. Kavan Choksi Professional Investor does mention that the government may appoint members and set the inflation target for the Bank of England. On the whole, it has a major role in managing the financial sector and economy of the United Kingdom.

Kavan Choksi Professional Investor underlines the role of the Bank of England in changing interest rates

The Bank of England was founded in the year of 1694, as a private bank that lent money to the government for financing the increasing national debt. By the 19th century, the Bank of England had become the official Central Bank of the United Kingdom. This bank was given independence to set interest rates in 1997. Previously this role was undertaken by the Chancellor of the Exchequer. It however was feared that the chancellor took decisions for political reasons. As a result, the Bank of England was ultimately provided with the independence to set interest rates for economic rather than political factors.

The Bank of England has a target to keep inflation – the official measure of how quickly prices are rising – at 2%. The headline CPI inflation rate went down from a high of 11.1% in October 2022 to 6.7%, in August 2023, down from 6.8% in July. The latest fall took place owing to food price inflation dropping back, but this remains at 13.6%. Despite the latest fall, CPI is still more than three times the Bank of England’s target. “Core” inflation, which excludes the price of tobacco, alcohol, food and energy additionally dropped to 6.2% in August, down from 6.9% in July.

The major drivers of the recent sharp increases in inflation were initially the rising energy and food costs. These expenses had surged majorly due to global events such as the war in Ukraine, along with other factors like wage increases in the UK.

Increasing the UK’s official interest rate is the traditional response of the Bank of England, in regards to rising inflation. Kavan Choksi Professional Investor points out that this impacts the borrowing and savings rates charged by High Street banks to individuals as well as businesses. The Bank of England increased interest rates on 14 successive occasions since November 2021. It however held rates at 5.25% in September and is had been widely expected to put them up to 5.5%.

Higher interest rates basically mean that people have to pay more for their mortgages, and hence are likely to have less money to spend on other things. In theory, as fewer people want to make purchases, the prices of things in the market can go up pretty fast. It also makes it harder for companies to borrow money and expand. On the other hand, if the Bank Of England does cut interest rates, borrowing becomes more affordable, and people will have more money to spend on other things. The situation may even encourage businesses and people to borrow and spend more, thereby boosting the economy.