Monetary policy is action that a country's central bank or government can take to influence how much money is in the economy and how much it costs to borrow.
As the UK’s central bank, we use two main monetary policy tools. The primary tool we use is Bank Rate. This is the interest rate we pay on deposits placed with us overnight by eligible firms such as commercial banks.
Additionally, when required, we can buy bonds to bring down long-term interest rates on savings and loans through quantitative easing (QE).
Monetary policy affects how much prices are rising – called the rate of inflation. We set monetary policy to achieve low and stable inflation. This is our primary monetary policy objective.
In practice, this means keeping inflation at 2% over the medium term, which is the target set for us by the Government.
Subject to this primary objective, we also support the Government’s other economic aim, which is strong, sustainable and balanced growth.
Our Monetary Policy Committee (MPC) decides what monetary policy action to take. The MPC sets and announces policy eight times a year (roughly once every six weeks).
The MPC has nine individual members. Before they decide what action to take, they hold several meetings to look at how the economy is working.
It can take around 18 – 24 months for monetary policy to have its full effect on the economy. So MPC members need to consider what inflation and growth in the economy are likely to be in the next few years.
We explain the reasons behind our monetary policy decisions (for example to raise or lower interest rates) in our quarterly Monetary Policy Report and in the published minutes of each MPC meeting.
We publish the dates the MPC will make announcements on monetary policy in advance. In the week leading up to each announcement, the committee meets several times.
Members are briefed on the latest data and analysis on the economy by our staff. The briefing includes a report on business conditions around the UK from our agents.
Members discuss the most recent economic data. The meeting is normally held in the week before the week of the announcement.
Members debate what monetary policy action to take. The meeting is normally held a few days before the announcement.
The Governor recommends the policy he believes will be supported by the majority of MPC members, and the members vote. The meeting usually is on the Wednesday, the day before the announcement.
Each individual member gets a vote, and the decision is based on the policy with a majority of votes. If there is a tie, the Governor casts the deciding vote. Any member in a minority is asked to say what stance of policy they would have preferred.
We publish the MPC’s decision with the minutes of the meetings at 12 noon on the day of the announcement, which is usually a Thursday.
We publish rate announcements both to our website and directly to market participants.
The Bank has released written transcripts of MPC meetings from 2015 at which policy was decided, as well as the associated policy briefing material.
These documents have been published outside the Bank’s usual archive release schedule as part of the Bank's commitments under the Warsh review in 2014 (Transparency and accountability at the Bank of England) to publish these materials with an eight year delay. In future, these documents will be released annually.