By Alec Chrystal of the Bank’s Monetary Assessment and Strategy Division, Andrew Haldane of the Bank’s International Finance Division, and James Proudman of the Bank’s Monetary Instruments and Markets Division.
Governments usually play a large role in the money and capital markets, so the needs of government finance often influence conditions in these markets. Until 1997, the Bank of England was responsible, as agent for the government, for both the implementation of monetary policy and the management of the government’s debt; hence the Bank had to be aware of any overlaps or conflicts between these two functions. The official responsibilities for debt and monetary policy within the United Kingdom changed after May 1997. The Monetary Policy Committee (MPC) was established within the Bank of England to set the official interest rate, and the Debt Management Office was established by HM Treasury to take over the management of government debt. Despite the removal of the responsibility for debt management from the Bank, it was thought that an understanding of the links between government debt and monetary conditions remained relevant to the monetary policy objectives of the Bank.