Bank Rate

Abstract

This was the label applied to the rate at which the Bank of England would discount first-class bills of exchange in the London market: by extension, it has come to mean the rate at which any central bank makes short-term loans available to domestic commercial banks. The UK Bank Rate’s practical significance dates from the Bank Charter Act of 1833, Section 7 of which exempted bills of a currency up to three months from the provisions of usury laws which had previously imposed a 5 per cent interest ceiling. This relaxation had been recommended in 1802 by Henry Thornton as a means of containing demand for discounts, which passed along a chain from country banks to London banks to the nascent last-resort central bank, and threatened to become excessive when market forces would have pushed rates above the ceiling. The urgency of such containment was increased as a result of (a) these ‘internal’ gold drains being reinforced by ‘external’ analogues related to the expansion of international trade and capital movements; (b) the imposition by the 1844 Bank Charter Act of a limit to the fiduciary issue, of Bank of England notes backed by holdings of securities, designed to ensure the maintenance of convertibility of notes into gold. The 1847 liquidity crisis forced the Government to promise a retrospective act of indemnity should this limit be breached, freeing the Bank to act as lender of last resort to whatever extent the exigencies of the crisis might require – but on condition that a Bank Rate of not less than 8 per cent be imposed.