Yesterday, I went to the Bank of England – and learnt how it affects Croydon

By - Wednesday 18th November, 2015

Jonny Rose reports back from the hub of UK finance

Being the founder of Croydon Tech City means that I’m often invited to private gatherings of wealthy, powerful people that I clearly have no business being at. Yesterday, I was invited to the Bank of England.

The Bank of England is one of those mythic institutions that most of us are aware of but have no idea how it works or what it does. Established in 1694 and precisely 12.1 miles from East Croydon Station, it’s hard to think how this antiquated building on Threadneedle Street can affect the lives of the common Joe on Katharine Street. And yet, affect us it does.

What does the Bank of England do?

By its own admission, the Bank of England exists to “promote the good of the people of the United Kingdom by maintaining monetary and financial stability”.

The Bank of England is much like any other bank: it just so happens that the customers that it lends to are other banks such as Barclays, Lloyds, HSBC and the Royal Bank of Scotland. As a result, it controls the vital organs of the British banking system.

When the Bank of England’s Monetary Policy Committee (MPC) changes its official interest rate – known as ‘bank rate’ – it is attempting to influence the overall level of activity in the economy in order to keep the demand for, and supply of, goods and services roughly in balance. Doing so results in a rate of inflation in the economy consistent with the bank’s 2% inflation target.

Why is the bank rate significant to Croydon?

When demand for goods and services in the economy exceeds supply, inflation tends to rise above the bank’s target rate of 2%. On the other hand, when supply exceeds demand, inflation tends to fall below the bank’s 2% target.

By changing bank rate the Bank of England is able to influence a range of other borrowing and lending rates set by commercial banks and building societies, and hence spending in the economy, in order to keep inflation on track to meet the 2% inflation target.

A reduction in interest rates makes saving less attractive and borrowing more attractive, which stimulates spending. Lower interest rates can also affect consumers’ and firms’ cash-flow – a fall in interest rates reduces the income from savings and the interest payments due on loans. Borrowers tend to spend more of any extra money they have than lenders, so the net effect of lower interest rates through this cash-flow channel is to encourage higher spending. The opposite occurs when interest rates are increased.

Changes in bank rate also affect the price of financial assets and the exchange rate, which affect consumer and business demand both positively and negatively.

For example, lower interest rates can boost the prices of assets such as houses. Higher house prices enable existing homeowners to extend their mortgages in order to finance higher consumption. Higher share prices raise households’ wealth and can increase their willingness to spend.

Changes in spending feed through into output and, in turn, into employment. That can affect wage costs by changing the relative balance of demand and supply for workers. The impact on output and wages feeds through to producers’ costs and prices, and eventually consumer prices.

The Bank of England’s impact on Croydon

So, how does the Bank of England affect Croydonians? Well, in pretty much every way!

It impacts how much money you pay on your loan. It impacts your wages. It impacts whether you will still have a job next week. It impacts whether your customers have enough disposable income to spend at your shop. It impacts the interest on late payments to the Croydon Conference Centre (“the prevailing Bank of England Base rate plus 8%“).

Perhaps the more interesting question, then, is how can Croydonians impact the Bank of England?

In August, Croydon was the source of much chagrin for BoE when rising house prices in Thornton Heath funded by foreign buy-to-let investors were thought to be inflating a housing bubble. The Croydon Communists have been long-term critics of the Bank of England who they recently decried as “representing the interests of the 1%, not the 99%”.

The Bank of England is primarily accountable to parliament through the House of Commons Treasury Committee, before which the governors, executive directors and bank committee members regularly appear. Unfortunately, there are no public meetings in which Croydonians can meet those that occupy the corridors of monetary power. Not that it would do much good if there were.

So, apart from being responsible borrowers and wealth creators, the main lever with which Croydonians can exercise influence on the Bank of England is through democracy. Croydon South MP, Chris Philp, sits on the Treasury Committee, so if – like the Croydon Communists – you have a bone to pick with BoE, you would do well to contact him directly with extensive notes on the pros and cons of quantitative easing.

Otherwise, please do let me know your deeply-held views on the LIBOR-OIS spread, and I’ll be sure to relay them to Mark Carney next time I see him.

The next Croydon Tech City event takes place on Thursday 19th November, at 7pm at Matthews Yard. To attend, please register here. All welcome!

Jonny Rose

Jonny Rose

Jonny Rose is a committed Christian who has lived in the Croydon area for nearly twenty years. He is an active participant in his local community, serving at Grace Vineyard Church and organising Purley Breakfast Club, and was ranked "Croydon's 37th most powerful person" by the Croydon Advertiser (much to his amusement). He is the Head of Content at marketing technology company Idio, the founder of the Croydon Tech City movement, a LinkedIn coach, and creator of Croydon's first fashion label, Croydon Vs The World. Working on Instagram training. Views are his own, but it would be best for all concerned if you shared them. Please send your fanmail to: jonnyrose1 (at) gmail (dot) com

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  • Serena Alam

    So, you’ve STARTED using the term ‘Croydonian’ now have you, Jonny?!
    (I JUST can’t keep up with you. Lol.)