Memorandum from the Bank of England
The Bank, a corporation established by royal
charter, has a number of formal relationships with the Treasury
which result from legislation, particularly the 1946 Act which
nationalised the Bank and the Bank of England Act 1998. These
set out requirements for consultations and discussions on a variety
of issues, ranging from appointments to the financing of the Bank.
The first part of this note sets out some of the ways in which
the Treasury and the Bank interact as a result of legal requirements.
Beyond the formal relationships, there is extensive
and regular liaison and discussion between the Treasury and the
Bank at all levels on a wide variety of technical and policy matters.
Bank of England and Treasury staff would expect to know their
counterparts in the other organisation whenever there are areas
of common interest. Most of these contacts are related to particular
issues so they are best described under functional headings. The
rest of the note covers these relationships.
Requirements for consultation, discussion or
approval, and decisions affecting the Bank made by the Treasury/Government
are highlighted in italics.
Until two years ago, the main legislation relating
to the Bank was the 1946 nationalisation Act. This continues in
force but was amended and in part repealed by the Bank of England
Act 1998, which established the Bank's operational independence
in setting monetary policy, transferred banking supervision to
the Financial Services Authority and put cash ratio deposits (which
provide finance for the Bank from private sector financial institutions)
onto a statutory basis.
The Bank's corporate governance is very closely
modelled on that of the private sector, with the Court (or board)
of directors responsible under the legislation for the management
of the Bank's affairs, other than the formulation of monetary
policy. Court has set up an audit committee and a remuneration
committee, and it appoints an external auditor for the accounts.
The Treasury is not therefore involved in the management of the
But the Treasury does decide on the level
of finance available to the Bank from cash ratio deposits. This
previously voluntary system, under which interest free deposits
are placed with the Bank by the banking sector, became statutory
in the 1998 legislation. The level of CRDs is set by the Treasury
after extensive consultation between Treasury and Bank officials,
and is related to the Bank's financial requirements. After
the first round of consultations under the statutory framework,
which took place in 1998, the level of CRDs was fixed for a period
of five years. CRDs are one of the three main sources of income
for the Bank. The others are the income from the Bank's own capital
and fees paid for services.
The appointment of all 19 members of Court
is by the Crown. Court comprises 16 non-executive Directors
and three executives of the Bank, who are the Governor and the
two Deputy Governors. The 1998 Act also set up a sub-committee
of all the non-executive directors with a number of specific responsibilities,
including reviewing the Bank's performance in relation to its
objectives and strategy and reviewing the procedures (but not
the policies) of the MPC. The chairman of the sub-committee
is nominated by the Chancellor.
The remuneration of non-executive Directors
is set by the Bank with the approval of the Chancellor. The
remuneration of the Governor and Deputy Governors is determined
by the Bank.
The Bank is required by the 1998 Act to make
an annual report to the Chancellor each year, to be laid before
Parliament. The annual report must also contain a report by the
sub-committee of non-executive directors on the discharge of their
The Act provides for a dividend to be paid
to the Treasury of half the Bank's net profits after tax "or
such other sum as the Treasury and the Bank may agree."
The 1998 Act set up a Monetary Policy Committee
of nine members, whose four external members are appointed
by the Chancellor. Two of the executive members of the MPC are
appointed by the Governor after consultation with the Chancellor.
A Treasury representative participates in MPC meetings but does
The Act gives the Bank a general objective of
maintaining price stability and, subject to that, to support the
economic policy of the Government, including its objectives for
growth and employment.
The Treasury must at least once a year set
out a remit for the Bank, specifying "what price stability
is to be taken to consist of, and what the economic policy of
Her Majesty's Government is to be taken to be". The current
remit specifies that if inflation (as defined by the RPIX measure)
strays more than 1 per cent either side of the target of 2.5 per
cent then the Governor must write an open letter to the Chancellor,
explaining why, what will be done to remedy the situation and
how long it will take.
The Treasury, after consultation with the
Governor, may by order give the Bank directions under the 1998
Act with respect to monetary policy if it is satisfied that these
are required in the public interest and by extreme economic circumstances.
The 1998 Act also gives the Bank powers to collect
statistical information from a range of financial institutions.The
Treasury may make orders on the coverage of this provision but
must first consult the Bank, the ONS and those liable to pay CRDs.
At the most senior level, there are regular
informal meetings between the Governor and the Chancellor. They
discuss a wide range of issues of common interest to a Treasury
and its central bank, including the markets, but not interest
Other relationships are more easily described
by Bank function.
The non-voting Treasury representative on the
MPC (a function arising from the 1998 Act) plays the key role
in liaison between the Treasury and the Bank over economic policy.
The representative, a senior official, attends the MPC meeting
itself and also the pre-MPC briefing meeting the Friday before.
He may at the Treasury's discretion brief the
MPC confidentially in advance of major events such as the Budget,
the annual pre-Budget report andthis yearthe Comprehensive
Spending Review, if the information would not otherwise be available
to the committee in time for its monthly decision and if it is
relevant to policy. These briefings may take the form of a short
account given at a monthly MPC meeting or a separate longer meeting
with the MPC. Such briefings focus on the macroeconomic and fiscal
policy overview and do not include advance notice of particular
measures. More detailed briefings may be arranged by the Treasury
for the MPC once their own policy announcements have been made.
Beyond these formal processes, the Monetary
Analysis area of the Bank has frequent contacts with Treasury
counterparts. The two organisations encourage the development
of links at working levels between their staff, and these tend
to be informal and related to specific topics, for example to
discuss work on the analysis of fiscal issues, the labour market
or the world economy. There are also regular contacts between
the Bank and Treasury forecasting teams aimed at understanding
the mechanics of the two forecasting processes, which are useful,
for example, in pinpointing differences in assumptions. However,
the teams do not input into each other's forecasts. Informally,
Treasury and Bank economists offer standing invitations to each
other's research seminars, and they keep in touch on issues relating
to the development of statistics.
Senior economists from Monetary Analysis are
involved with Treasury officials on a number of international
committees. These include the Economic and Financial Committee
and the Economic Policy Committee of the Council of Ministers.
At the OECD, the Bank is represented at Deputy Governor level,
alongside a Treasury representative, on Working Party 3, which
covers international macroeconomic and monetary issues. Bank and
Treasury economists, also sit on other OECD committees and participate
jointly in OECD meetings.
A formal non-statutory Memorandum of Understanding
between the Bank, the Treasury and the Financial Services Authority,
agreed in 1997, sets out the framework for co-operation between
the three organisations in relation to financial stability. The
Bank is responsible under the MoU for the stability of the financial
system as a whole.
Under the MoU, a Standing Committee of the Treasury,
the Bank and the FSA meets monthly to discuss individual cases
of significance and any other developments relevant to financial
stability. The Bank is represented on the committee at Deputy
Governor and Executive Director level.
The Deputy Governor and Executive Director each
have regular bilateral meetings with their senior counterparts
at the Treasury. There are also extensive contacts between Bank
experts on financial stability and Treasury officials at many
levels on issues related, for example, to the structure of payment,
clearing and settlement systems, to the legal and regulatory environment
for, especially, wholesale financial markets, to the international
financial system and to financial services developments more generally.
The Bank's Coordination Unit for Europe has
extensive dealings with Treasury officials. The Bank's Director
for Europe is a Member of the Economic and Financial Committee
with a senior Treasury official, and is accompanied by a senior
The Bank is also closely involved in practical
preparations for the euro, as part of the Government' prepare
and decide policy. Under these arrangements, the Governor sits
on the Chancellor's Standing Committee while the Bank's Director
for Europe is on the Project Management Group, which steers the
National Changeover Plan and is chaired by the Treasury. The Director
for Europe is also a member of the joint public/private sector
Business Advisory Group. The Bank has been given responsibility,
under the National Changeover Plan, to co-ordinate practical preparations
where necessary across the City. It has established, under the
Treasury umbrella, a City-wide committee (the City Euro Group),
which the Director for Europe chairs, to assist this responsibility.
The Bank is banker to the Government, holds
the main central government accounts and provides a variety of
banking services to the Treasury and other government departments,
for which it charges on the basis of the cost of providing the
The note issue
The Bank is responsible for the issue of bank-notes
and, under the relevant legislation to pay the seignioragethe
profit on the note issueto the Treasury. The Bank's expenses
in relation to printing and issuing notes are agreed each year
with the Treasury and management of the note issue routinely gives
rise to a number of matters for discussion between the relevant
Bank and Treasury officials.
Foreign exchange operations and reserves management
The Bank manages the foreign exchange and gold
reserves of the Exchange Equalisation Account as agent of the
Treasury, which owns them. It also manages the government's foreign
currency debt, in order to ensure that the government's foreign
currency balance sheet, both assets and liabilities, is managed
on an integrated basis with the aim of maximising returns within
a pre-specified risk framework.
These operations include publishing information
on the UK official reserves and foreign currency liabilities in
line with the IMF Special Data Dissemination Standard, and managing
the government's programme of gold sales. They also include undertaking
foreign exchange operations for government departments (including
any intervention from the EEA, which the Bank would undertake
on behalf of the Treasury, if instructed).
The Bank's responsibilities in this area are
set out in a remit from the Treasury, which is agreed each year,
and which sets out the activities which the Treasury wants the
Bank to undertake, including limits on risk exposures. Progress
is monitored at regular monthly meetings between Bank and Treasury
officials and, at a more senior level, at six-monthly meetings
between the Bank's Executive Director for Financial Market Operations
and the EEA Accounting Officer at the Treasury. The Bank charges
the Treasury its costs for these services.
The Bank is authorised to undertake foreign
exchange intervention on its own balance sheet in pursuit of its
monetary objectives. This would be a matter for decision by the
MPC, separately from any intervention the Bank might undertake
for the EEA on instructions from the Treasury.
As announced by the Chancellor in May 1997,
government debt and cash management have both been transferred
to the Debt Management Office. The Bank provides settlement facilities
to the DMO as banker.
There is regular contact between Bank and DMO
officials to exchange information on market developments, and
the Treasury and the DMO routinely consult the Bank on policy
matters in this area where they are relevant to the Bank's responsibilities.
For issues in this area that may be relevant to the Bank's monetary
responsibilities, the normal channel of communications is the
Treasury representative who attends meetings of the MPC.
The Bank runs the register of Government stock
for a unit charge agreed with the Treasury.
The Bank operates the sanctions regime as agent
for the Treasury.
14 July 2000