The Bank of England
Peep behind the scenes of the Bank of England to discover
how it keeps inflation under control.
What does the Bank of England do?
The Bank of England is no ordinary bank. It is not like a
high street bank. It has four out-of-the-ordinary jobs, one
of which hides the ‘trick’.
- It acts as the banker for the government. The government
needs a bank just as we do.
- It designs and issues banknotes.
- It uses clever designs that can’t easily be copied
so we can trust banknotes to be the real thing.
- It replaces notes that are old and scruffy.
- It makes sure the banking system is sound. This means making
sure the system that the banks use to move money between them
is safe and works properly.
- It sets the interest rate for other banks.
The Bank of England is the banker for other banks. It lends
money to all other banks so they are not short of money on any
particular day and charges them interest.
How does the trick work?
Inflation is caused by too much spending in the economy. It
can be kept low by controlling the amount of money being spent.
The Bank of England sets the interest rate for lending money
to other banks. If it sets it high, the high street banks will
choose to set theirs high. If the Bank of England sets it low,
the high street banks will choose to set theirs low.
The Bank doesn't want to stop people spending, but setting
a higher interest rate for saving and borrowing will encourage
people to think carefully about what they do with their money
– whether to save a bit more and spend a bit less.
Key Resources
