1. Bank of England

The Bank of England was originally established as a privately-owned institution in 1694 to promote the public good and benefit of the people of the United Kingdom by maintaining the monetary and financial stability. Post Second World War the Bank of England was nationalised on 1946. Till the 18^th century the Bank of England has been regularly acting as the Government’s banker by raising funds to support the government activities. Since the early 19^th century the bank has become the banker to the banking system as well.

In 1997, the parliament voted to give the Bank operational or instrumental independence. The Bank now operates under the Act 1998 that sets out the current governance and accountability framework. The Monetary Policy Committee (MPC) has been established under the same Act. Instrument or operational independence alludes to the central bank’s ability to freely adjust its policy tools in pursuit of the goals of monetary policy as set by the government (Walsh, C 2005).

However, the independence of the Bank of England have been controversial and an issue of debate which is also mainly discussed in this paper.

2. Government

Government sets out the target for the Bank of England’s Monetary Policy Committee. Governments have recognised four major macro-economic goals which are to be achieved as follows:

• Price Stability (low and stable inflation)
• High and stable real growth
• Low unemployment
• Balance of payment stability

3. The Monetary Policy Committee (MPC)

The operation of MPC has been set out under the Act 1998 which authorises the Bank to set the interest rates freely to meet the Government’s inflation target. There are nine members in the committee; the Governor, the three Deputy Governors, the Bank’s Chief Economist, the Executive Director for Markets and four external members appointed directly by the Chancellor.

They are all independent members. During the process of setting interest rate they vote individually to the level of interest rate which they believe would meet the inflation target. In all MPC meeting there is one representative from the Treasury to discuss policy issues.

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The goal of MPC cannot be totally independent from the government as the Bank works to achieve the target set out by the government and its economic policy. Therefore, the objectives of MPC are closely tied up with the government’s macro-economic goals which are as follows:

• low and stable inflation;
• high and stable real growth, together with low unemployment;
• stable financial markets and institutions;
• stable interest rates;
• stable exchange rates.

4. Central Bank Independence in General

Independence has two aspects: firstly, independent central banks can be free to set their own budgets, while if politicians controlled their funding, their decisions would be influenced by politics; secondly, independence means central banks are protected from their decisions being reversed by ‘outside’ bodies. However, there has always been a controversy about the independence of central bank and the question has arisen “Is the Central Bank Independent?”