The Role and Main Functions of the Bank of England and the European Central Bank - Assignment Example

Lecturer’s presentation: The Bank of England has a major role to play in ensuring the sustenance of economic policies of the nation. It has the duty of maintaining the stability of money and the economy. In other words, it plays a principal role of ensuring that the monetary system is not affected by external factors as well as ensuring that the economic system remains stable. More over, the bank has an obligation of ensuring the effective implementation of the usual bank functions involving provision of banking services to citizens. The British government is highly reliant on the bank in upholding its financial policies as well as maintenance of price stability to help in avoidance of inflation in the economy. It is in charge of determining the interest rates of the country. This role puts it in a position that is largely significant to the economy as well the government. It is also responsible for providing bank notes as well as pound notes, and their eventual removal from the monetary system (Sam Peltzman 1989 pp.69-72). In conjunction with other roles, the Bank of England has an important role to play in offering services to the citizens. More over, it is in charge of management of the country’s foreign exchange which is a very important part of the overall economy. It also has a role of the management of the nation’s gold reserves. In order to boost the economic affairs of the country, the bank is in charge of giving technical support and guidance through the center for Banking Studies to the rest of the central banks. Maintenance of the consolidated fund of the government is another major role of the Bank of England. In this case, it acts as the government’s banker. The European Central Bank has a significant role in the management of the euro, which is the European Union’s single currency and also just like the Bank of England ensures the maintenance of stable prices to safeguard the more than 50% of the citizens in the European Union who make use of the euro. Just as the Bank of England, the European Commercial Bank organizes and implements the fiscal policies, but for this case in the European Union. The European Central Bank also works hand in hand with the other national central banks in order to prepare and oversee the implementation of the decisions made by the decision making bodies of the European Union. These include the Executive Board, the Governing Council as well as the General Council. The European Central Bank also has a mandate of ensuring the avoidance of inflation which could lead to deterioration of the purchasing power of the euro. This is achieved through ensuring price stability within the nations that use the euro (Paul Pierson and Stephan Leibfried 1995 pp. 78-86). Both banks maintain a regular inflation of 2% through the control of money supply whereby they maintain a low money supply in relation to the market supply of goods, as well as price trends monitoring which enables them to identify the potential risk posed by price fluctuations in the euro area. The European Central Bank has also played a significant role in helping the government to achieve its main policy objectives. It has largely contributed to European and international financial markets thereby enhancing economic stability in the euro region which has been a major policy objective for governments in the region. Just as the Bank of England serves as a lender in times of emergency, the European Central Bank acts on emergency situations aimed at fine tuning activities when the economy is being faced by crisis. It has been successful in maintaining an organized and effective money market in the euro region. Even if the bank has not been perfect in maintaining the desired level of inflation, it has been successful in maintaining it close to the desired level. It has also been capable of maintaining an upward trend in the economic activities of the region (Andrew Moravcsik 2005 pp 37-41). The Bank of England is in charge of protecting the economy from external threats through constant surveillance and the use of market intelligence. These direct the financial operations designated for this purpose on how to deal with the threats to the economic system locally and overseas. In some instances, the bank may lend money to when there exists no other financial institution to do it. On the other hand, it maintains monetary stability through ensuring that the market prices remain stable in order to meet the government targets on inflation. In this regard, it adjusts the base of the interest rate so that it can be able to satisfy the government’s demand. However, this role was put under the Bank of England from 1997. It has a committee that is responsible of determining the most appropriate interest rates for the monetary system to be at the recommended levels of inflation (Fritz Scharpf 1988 pp. 65-69). The European Central Bank has been successful in setting up the European Union’s monetary policy. It is charged with the responsibility of maintaining sustainable levels of employment as well as reduced inflation. It is also in charge of the foreign reserves of the countries that are members of the European Union. Just like the Bank of England, the European Central Bank controls and manages the foreign exchange of member countries, foreign reserves as well as issuance of bank notes. It monitors the banking sector and also acts as a lender in times of crisis. This happened in the 2007 credit crisis when banks were given funds by the European Central Bank in a bid to restore stability in the financial system. The Bank of England has been able to achieve the monetary policy objectives of the government. Since it was bestowed the responsibility in 1997. It has been closely working with the government in order to achieve the economic objectives of the government. The economic policy of the government allows the bank to work with unlimited autonomy in the management of the nation’s financial system. It has an important role to play in ensuring that the employment targets and economic growth that the government sets are successful. This is because the government through the monetary policy committee uses the bank’s name to formulate the fiscal policy (Andrew Moravcsik 2005 pp. 81-84). The bank has been successful in maintaining an inflation rate of 2% in the economy of Britain which has been the government’s annual target. It has also succeeded in ensuring that there is neither too little or too high inflation rates which are probable indicators that the economy is stagnant. It has been its mandate to ensure that the conditions for growth are favorable while at the same time the prices remain stable throughout the economy. Together with this, the bank has been successful in the maintenance of strong levels of employment in the country. It has been committed to a regime which is responsible and accountable to its policies. It was the bank that established the level of inflation that is suitable for the country, which settled at 2%. Both banks are significant institutions in the economic systems of the European Union and Britain (Fritz Scharpf 1988 pp. 36-44). Bibliography 1. Moravcsik, A. 2005. The European Constitutional Compromise and the Neo-Functionalist Legacy. Journal of European Public Policy, 12, 2, 349 – 86 2. Peltzman, S. 1989. The Economic Theory of Regulation after a Decade of Deregulation, Brookings Papers on Economic Activity, 1– 41. 3. Pierson, P. and S. Leibfried 1995. European Social Policy, Brookings Institution Press. 4. Scharpf, F. 1988. The Joint-Decision Trap: Lessons from German Federalism and European Integration, Public Administration, 78, 234 – 78. Read More