Bank of England and Monetary Policy

One of the Bank of England's two core purposes is monetary stability. Monetary stability means stable prices - low inflation - and confidence in the currency. Stable prices are defined by the Government's inflation target, which the Bank seeks to meet through the decisions taken by the Monetary Policy Committee.

A principal objective of any central bank is to safeguard the value of the currency in terms of what it will purchase. Rising prices – inflation – reduces the value of money. Monetary policy is directed to achieving this objective and providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy usually operates in the UK through influencing the price at which money is lent – the interest rate. However, in March 2009 the Bank's Monetary Policy Committee announced that in addition to setting Bank Rate, it would start to inject money directly into the economy by purchasing assets - often known as quantitative easing. This means that the instrument of monetary policy shifts towards the quantity of money provided rather than the price at which the Bank lends or borrows money.

Low inflation is not an end in itself. It is however an important factor in helping to encourage long-term stability in the economy. Price stability is a precondition for achieving a wider economic goal of sustainable growth and employment. High inflation can be damaging to the functioning of the economy. Low inflation can help to foster sustainable long-term economic growth.