Bank of England (BoE) Governor Andrew Bailey said on Thursday that financial markets need to be better prepared for future shocks and monetary policy must stay focused on bringing inflation back to target.

Policymakers should strengthen core financial markets so they can absorb future shocks without amplifying them.

When shocks become more frequent, underlying growth is weaker, and the succession of shocks leads to a higher level of government debt, it's much harder for governments to use balance sheets to cushion a severe downturn.
Greater absorption of government debt has come with greater fragility.
Commitments on fiscal policy are needed more than ever when negative shocks occur
Monetary policy needs an unwavering commitment to returning inflation to target.
Evidence of pass-through of energy costs into broader inflation is currently quite subdued but there are risks.
Inflation risks rise longer high energy prices persist.
Fully committed to returning inflation to target.
We are seeing volatile markets.
Market movements are some way from normal, but we are not seeing illiquidity or stressed conditions.

BoE FAQs

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

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