Bank of England (BOE)
The Bank of England, or usually known as the BOE, is the central bank of the United Kingdom. Being one of the word’s oldest central banks, it is considered to have been a model based on which most other central banks were built. It was established back in 1694, and its goal was to act as the English Government's banker. It is one of the most ancient banks in the world. Stockholders privately owned it in 1694, and later on, it was nationalised in 1946.
The Monetary Policy Committee (MPC) was formed with the implementation of the Bank of England Act of 1998. The MPC was given full responsibility in setting monetary policy in the United Kingdom, but the Treasury Solicitor wholly owns it on behalf of the Government. It now has full independence when it comes to setting monetary policy.
This bank is one of the eight banks authorised to issue banknotes in the UK, and it has a monopoly on the issue of banknotes in England and Wales.
How the Bank of England Works
The Governor of the BOE is also in charge of leading the Monetary Policy Committee, which has nine other members. The Monetary Policy Committee meets eight times a year to consider the need to change interest rate policy and to discuss how to achieve the inflation target.
Each member has one vote, and a consensus is not a requirement. The Bank of England is in charge of raising and lowering the bank rate. This bank rate is the one that is a charge to domestic banks.
With the chance that Britain could exit the EU (although Britain doesn't use the Euro), the Bank of England has created a scenario called Brexit for British Exit. It has been charged with developing plans to handle possible economic fallout or other problems along the way when it comes to inflation and the general economy.
How the Bank of England Affects Forex Trading
The bank's latest changes to monetary policy have a huge impact when it comes to trading decisions mainly because it has a significant effect on the Pound Sterling and fixed-income markets such as UK Gilt Bond Yields.
All the decisions regarding the monetary policy are significant for the entire economy. The BOE monetary policy committee has set an inflation target of 2%. The increase in interest rates can cause a good appreciation in the Pound, mainly because investors will start to increase capital flows into the higher-yielding currency.
This situation can also harm the stock market, mostly because the businesses will need to pay higher rates to lend, and equity valuations will start to be discounted at a higher interest rate.
To understand this better, you can think about it this way: a higher interest rate expectations can increase the strength of the Pound and negatively affect equity values. On the other hand, a lower interest rate expectations can decrease the power of the Pound and positively affect equity values.
The Bank of England is essential to the value of the Pound. Every trader needs to know that the Pound will appreciate or depreciate depending on changes when it comes to interest rate expectations, not just on actual changes. Also, rising inflation doesn't mean that the BoE will increase interest rates; As typical with central banks of developed economies, it depends on the balance between economic and inflation growth.