Bank of England
The BoE is the world's second-oldest central bank (founded 1694) and model for modern central banking. Granted operational independence in 1997, it sets interest rates to achieve the government's 2% inflation target while also supervising the UK banking system.
The BoE resembles a hermit crab—inhabiting a borrowed shell of credibility ('independence') that it found in 1997 but didn't grow itself. The shell isn't part of the organism—it's borrowed from a dead creature (post-inflation consensus of the 1990s-2010s).
The BoE stores 400,000 gold bars worth ~£200 billion in vaults beneath Threadneedle Street—the world's second-largest gold vault after New York Fed—yet has never had a successful theft in 330 years. More surprising: the BoE was granted 'operational independence' in 1997 but simultaneously lost bank supervision powers to the FSA. This split directly caused the Northern Rock disaster—the 'tripartite' arrangement had no clear leader, and it took the UK's first bank run in 150 years to reveal that 'independence' had created an accountability vacuum.
Key Facts
Power Dynamics
MPC sets interest rates via majority vote. Operational independence since 1997 to achieve inflation target set by Treasury.
'Goal-dependent, instrument-independent'—Parliament sets target (2% CPI), Chancellor elaborates in annual remit letter, BoE chooses how to achieve it. The Treasury indemnity on Asset Purchase Facility is the real power relationship: all QE profits/losses flow to Treasury. Since 2022, Treasury has paid £49.4 billion to cover APF losses.
- Treasury can override BoE 'in extreme circumstances' with Parliamentary approval (never used)
- Treasury Select Committee holds regular hearings
- Chancellor appoints 4 external MPC members
- Annual remit letter from Chancellor can subtly redirect priorities
- HM Treasury (sets target, provides APF indemnity, appoints members)
- Treasury Select Committee (holds hearings, grills Governor)
- Financial markets (gilt market is transmission mechanism)
- Prudential Regulation Authority (bank supervision, now back inside BoE)
Revenue Structure
Bank of England Revenue Sources
- Interest on APF gilt holdings (£895bn) 70%
- Interest on foreign reserves 15% →
- Banking services to government 10% →
- Seigniorage on banknotes 5% →
Currently negative net
APF is indemnified by Treasury, so losses don't hit BoE's balance sheet—they flow directly to government. Lifetime APF cost now estimated at £104.2 billion net loss. Creates political risk without financial risk.
Fed has similar losses but uses 'deferred asset' accounting. ECB losses flow through NCB dividends. BoE's Treasury indemnity is most transparent but most politically exposed.
Decision Dynamics at Bank of England
Post-Brexit emergency (June 24, 2016): Governor Carney appeared on TV within 1 hour of referendum result, held bank CEO call before markets opened, announced £250bn emergency liquidity. Formal rate cut took until August 4.
Northern Rock (2007): Bank requested emergency liquidity in August, dithered for weeks, news leaked September 13, run began September 14 (first UK bank run since 1866). Nationalization not until February 2008—6 months of paralysis.
Split votes create uncertainty. December 2025 was 5-4 to cut rates; August 2025 required two voting rounds (first time in MPC history). When Governor uses tie-breaking vote, signals deep division.
Failure Modes of Bank of England
- Black Wednesday (September 16, 1992): Spent £3.3 billion defending pound's ERM peg, raised rates from 10% to 15% in single day, failed, withdrew from ERM that evening. Soros made £1bn.
- Northern Rock (September 2007): First UK bank run in 141 years, live on BBC. Tripartite system failed catastrophically—FSA watched capital ratios while missing 75% wholesale funding mismatch.
- 1970s inflation: UK inflation peaked at 24.2% in 1975 with no BoE independence.
- Treasury indemnity as constraint—APF losses create political pressure to end QT
- Gilt market dependency—UK has large current account deficit requiring foreign capital
- Narrow mandate—2% target is rigid when supply shocks hit
- Thin staff vs broad mandate—4,000 staff vs Fed's 23,000
Stagflation returns: energy shock drives inflation to 8% while economy is in recession. MPC splits: hawks vote to hike (inflation mandate), doves vote to hold. Government blames BoE, Chancellor threatens independence revocation. The 1997 settlement only works when inflation and growth align.
Biological Parallel
The BoE inhabits a borrowed shell—'independence'—that it found in 1997 but didn't grow itself. Like a hermit crab, it has a soft, vulnerable abdomen (political exposure, Treasury indemnity dependency) protected by hard external structure (operational independence statute). But it must periodically leave the shell to find a larger one, exposing soft parts. The shell isn't part of the organism—it's borrowed from a dead creature (post-inflation consensus of 1990s-2010s). The 2022 Truss crisis showed the shell cracking. Parliament could revoke independence with a simple majority vote. The creature survives by never making the political system want to evict it.
Key Agencies
Sets interest rates (5 internal + 4 external members)
Macroprudential regulation since 2013
Bank supervision (returned to BoE after 2012 reforms)