The Bank of England and the European Central Bank - Essay Example

The Bank of England and the European Central Bank This is an economic study set out to analyse the Bank of England and the European Central Bank. To this the question, “Which are the roles played by the Bank of England and the European Central Bank?” will be answered. Also the success in their monetary policies will be briefly analysed. The Bank of England was established in 1694 and it’s regarded as the central most of UK’s banks. It is housed by a building located in London city on the street of Threadneedle. This bank is where the Monetary Policy Committee is housed and makes decisions. This Committee makes monetary policies in the nation of England. The main role played by this bank is to ensure economic stability and also the upholding of the set economic policies in this country. This bank offers the services of any other bank and thus provides the financial services needed by the population of England. Further, the bank has two positions of great essence. Firstly, it has the position of the chief cashier and secondly, the bank of England’s governor. These two mentioned positions call for well versed persons as regards the economy of England and the monetary system going tandem. The bank of England first became the official public central bank of England in 1946, besides its being founded in 1694. It serves the same purpose as the Federal Reserve Bank of U.S.A. To this it sets the economy’s policy of the country. It’s also obliged to make all bank notes in the economy of England and also ensure their retirement. The bank has for some time, held a very important position in the English Economy and also so to the entire globe. (England.mu, 2007) The ECB (European Central Bank) on the other hand together with 15 central banks of the member states of the European Union. As per the ‘Maassricht treaty’ it’s called the ESCB (European System of Central Banks). The ECB, therefore, together with 15 central banks, initiated a single common currency for the member states of EU. The EU member states are 12 in number, but were originally 11. These are thus called the Eurostystem. The Eurostystem top-most body for decision making is the governing council of European Central Bank. The Committee is analogous to the Federal Reserve System’s Open Market Committee. The Committee is the one responsible for the making of all monetary policy decisions around the Eurozone. The governing council of the European Central Bank is made up of an executive board of six members. These members of the governing council are usually appointed by the heads of state in a common accord. The heads of state come from the Eurozone and the executive board members are recommended by the Finance Ministers for the Euro group states after consulting the Parliament of Europe and the governing council of the ECB. All the members of the executive Board of ECB are required as a mandatory factor to have professional qualifications. Governors of the country central Banks belonging to the 12 members’ states of Euro zone are often appointed for a term running for five years by their respective parliaments or governments. Monetary policy decisions of the ECB are determined by a simple majority of the governing council members. In case a tie is witnessed in the voting the president is called for to cast a vote. Regardless of the home country each of the members of the governing country’s vote has an equal impact. As stipulated by the 1989’s Delors committee, the Delors committee is mandated to make a study as well as propose recommendations upon how a monetary union and an economic union should be set up. They recommend to the EU member states to adopt one currency with ESCB being responsible for the formulating as well as the implementation of a monetary policy in the established single currency area. The central bank that was proposed had been seen to have a resemblance of the Federal Bank of the US. The fundamental objective of the European Central Bank was put across in the pre-euro Deutsche Bundesbank’s model. The functions, powers and the organisation of ESB are laid out the Article numbers 105-115 of the European Union’s Treaty. This EU treaty is also the one referred to as the Maastricht treaty. The role of European central Bank is the Formulation and the implementation of monetary policy of the covered area. This supranational body doesn’t share these powers with any other community. A council formed by the Economic Ministers and the Finance ministers of the EU from the 15 member states formulate the guidelines governing the macroeconomic policies for the member states. They also conduct the surveillance in the areas affected by the policy. Such surveillance may touch the debt ratios and public deficit. The council harmonises the laws of tax in the 15 EU member states and formulates the exchange rate policy of the euro as well. This responsibility is also a shared one in the ECB. (Apel, 2003 pp 3-4) The monetary policy committee of the bank of England is the one responsible for making monetary policy decisions. They set the rates of interest in the economy so as to ensure the targets of inflation set are met. To ensure success, the government sets fixed terms of service to the members and also they may get replaced once their terms are over. Depending upon their performance, they may also be re-appointed. Every month, the committee meets to set the interest rates. To make sure that they are accountable to the entire population, they make a lengthy period to explain their views and their decisions as well. Minutes of the committee are also published two weeks following their setting of interest rate decisions. (Bank of England, 2007) The ECB has on the other hand been criticised by most academicians due to their strategies for monetary policy. However, it’s perceived that its monetary policy is a success since it was established. For instance, inflation in the covered area has remained relatively low at around 2%. Also the projected rate of inflation has been seen stable. (Haan, et al, 2005, p 225) To conclude, therefore, the banks of England and the European Central Bank have played a very vital role and function towards enforcing stability in the respective economies and also the achievement of monetary policies. For instance; the recent global credit crisis has seen the two banks cut the rates of interest to counter the negative effects. (Rebeka, 2008) Work cited: Apel, E. Central Banking Systems Compared: The ECB, the Pre-euro Bundesbank, and the Federal Reserve System. Routledge. (2003). Pp 3-4. Bank of England. Monetary Policy Committee. (2007). Retrieved March 11, 2009 http://www.bankofengland.co.uk/monetarypolicy/overview.htm England.mu. The Bank of England. (2007). Retrieved March 11, 2009 http://www.england.mu/articles/bank-england.html Haan, J. et al. The European Central Bank: credibility, transparency, and centralization. MIT Press. (2005). P 225. Manning, R. European Central Bank and Bank of England Cut Interest rates. (2008). Retrieved March 11, 2009 http://www.onlineforextrading.com/blog/ecb- boe-rate-cut/ Read More