Jan 9, 2009

Back to 1694..

On thursday the Bank of England reduced the Bank rate to 1.5%, as an effort to achieve its mainained target for CPI inflation of 2%. In spite of being an inflation targeter, the decision seems especially driven by the necessity to restore confidence in the market and provide a further stimulus to economic activity.

One historical curiosity that comes together with this decision is the following: today's Bank Rate is at its lowest level since 1694, which is the time the Bank of England was founded. The motivation behind the creation of a national bank, was to sustain the troubled financial position of the british government after the "Glorious Revolution". A scottish banker, William Patterson, envisaged a loan of £1,200,000 being made to the Government, in return for which the subscribers would be incorporated as the "Governor and Company of the Bank of England", with banking privileges including the issue of notes. The story is also here.

By the way,the Bank of England is not the first National Bank created. The very first one is this.

2 comments:

T-Viddy said...

As a current employee, I think that the Bank is still on course to hit the inflation target in the medium run. Monetary policy needs to be made with a certain forecast horizon in mind......
At present inflation is falling rapidly. Presumably we will return to around 3 % by mid year at the latest, even with low interest rates, because in the very short run inflation is driven by the fall in demand.

The sharp drop in commodity prices is also contributing to lower inflation.

Vancouver realtor said...

Yes, it seems like everybody has forgotten why was the Bank of England founded. We are talking about free pricing, free markets, but when it comes to the most important price, the price of money, administratively set prices are suddenly better. But economy is not a computer game. You can't push the "lower interest rates" button in bank's office to save the day...
Jay