Select Committee on Treasury Appendices to the Minutes of Evidence


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 This continues in force but was amended and in part repealed by the Bank of England Act 1998, which established the Bank's operational independence in setting monetary policy, transferred banking supervision to the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 Bank.

  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 own responsibilities.

  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."

Monetary policy

  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 not vote.

  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 rates.

  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 and—this year—the 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 Bank economist.

  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 services.

The note issue

  The Bank is responsible for the issue of bank-notes and, under the relevant legislation to pay the seigniorage—the profit on the note issue—to 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.

Domestic operations

  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.

Gilt registration

  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

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