Economic history · Quantitative Easing
Five steps, about eight minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
The Bank of England's job is usually described as keeping inflation at 2 per cent. Far fewer people have been told who chose 2, or what the Bank is allowed to do about it.
The arrangement itself is what this first part covers. The Chancellor names the number in a letter, and the Governor must write back when the Bank misses it by enough. The Bank has one main interest rate to hit the target with, nine people vote on it, they often disagree, and the full effect of a change takes a year or more.
It is the machinery every later part of this series takes apart. Five steps, and none of them assumes you know any economics.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 5
The Chancellor of the Exchequer chooses the target the Bank of England must hit, and on 26 November 2025 it was re-confirmed at 2 per cent.
The Bank of England Act 1998 requires the Chancellor, the minister in charge of the government's money, to say at least once every twelve months what price stability means. Rachel Reeves does it in a letter to Andrew Bailey, who runs the Bank as its Governor, and that letter is the for .
The target is measured on the Consumer Prices Index, which the statistics office describes as the cost of a fixed basket of goods and services. The Bank puts it the same way from its own side, saying the Government sets it a 2% target.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
The Bank of England is trying to keep inflation at 2 per cent. Who decides that the figure is 2, rather than 3 or 1?
The Governor has to write the Chancellor an open letter when the target is missed by enough, as Andrew Bailey did on 30 April 2026.
The remit fixes how big the miss has to be before a letter is due. A percentage point is the distance between two percentages, so inflation of 5 against a target of 2 is a miss of 3 percentage points.
Inflation reached 3.3 per cent in March 2026, far enough above the target to require a letter, and Andrew Bailey wrote to Rachel Reeves on 30 April. The Bank publishes these letters for anyone to read, and four went between June 2025 and April 2026.
The target is 2 per cent. By how much does inflation have to move away from it, in either direction, before the Governor is required to write to the Chancellor?
For scale. By the July 2026 meeting inflation had fallen to 2.6 per cent, 0.6 percentage points above the target, and no letter was required.
The Bank hits the target with one , Bank Rate, which it calls the core interest rate in the UK.
The Bank of England, Britain's , hits the target by choosing the level of Bank Rate. Raise Bank Rate and borrowing across the country gets more expensive; lower it and borrowing gets cheaper. The Bank does not set a shop price, a wage or a rent.
The Bank's own account is that its committee decides what level of Bank Rate is needed to return inflation to the 2 per cent target, or keep it there. The Federal Reserve, the European Central Bank and the Bank of Canada each name the interest rate they set as their main instrument.
So the chain runs one way. Rachel Reeves picks the number, a committee at the Bank votes on Bank Rate, a commercial lender decides what a mortgage costs, and a shop price moves last of all.
Bank Rate is an interest rate between the Bank of England and the banks. Which way does it run?
Bank Rate is set by the Monetary Policy Committee, nine people, and at their meeting ending on 29 July 2026 it stayed at 3.75 per cent.
The committee meets eight times a year, and every member's vote is recorded by name. Inflation had fallen to 2.6 per cent since the previous meeting, but it was expected to climb again as higher energy prices fed into other prices.
Each member sets out their own reasons in the minutes, under their own name, so a disagreement inside the Bank is a matter of public record. The committee judged in July 2026 that too much inflation was the greater risk and too little the lesser.
At the meeting ending on 29 July 2026 the nine held Bank Rate at 3.75 per cent, and three of them voted against. What did those three want?
Bank Rate reaches the prices people pay by several routes at once, and the Bank of Canada puts the full effect at 18 to 24 months.
The Bank of England puts the borrowing route plainly: higher interest rates leave people paying more on mortgages and loans, so they spend less. Shops and businesses that see customers spending less are less willing or able to raise prices. Lower Bank Rate and the chain runs the other way.
The Bank of Canada names four routes and borrowing costs are the first. A mortgage or a loan costs more when Bank Rate goes up, so there is less left over each month, and shops that see less trade put their prices up more slowly than they would have.
The Bank of Canada names four routes in all and puts the full effect at 18 to 24 months. The Bank of England calls these lags long and variable, and puts the peak effect of a change 1 to 3 years out.
So the nine voting on 29 July 2026 were setting Bank Rate for an economy in 2028 they could not see. There is no way to say afterwards whether they were right. That would mean comparing the 2028 that happened with the 2028 a different vote would have made, and only one exists.
Three of these are routes by which a change in the central bank's interest rate reaches the prices people pay. Which is the odd one out?
Module 1 of 9 in Quantitative Easing
The target, and who sets it
2 per cent on the Consumer Prices Index, confirmed by the Chancellor in a letter of 26 November 2025The miss that requires an open letter from the Governor
more than 1 percentage point either way, so above 3 per cent or below 1 per centWhat brought the letter of 30 April 2026
inflation of 3.3 per cent for March 2026, published on 22 AprilBank Rate at the meeting ending 29 July 2026, and the vote
held at 3.75 per cent, six to three, with three members wanting 4 per centHow long a change in Bank Rate takes to have its full effect
18 to 24 months by four routes at once, on the Bank of Canada's figure, with the Bank of England putting the peak effect 1 to 3 years outYou met five terms in this module
, , , ,
One number chosen by a politician, one lever held by nine people, and no way of knowing for certain what pulling it did.
[1] Who sets the inflation target, at what figure, and the size of the miss that requires a letter: HM Treasury, Remit for the Monetary Policy Committee, letter from the Chancellor of the Exchequer to the Governor of the Bank of England, 26 November 2025. The covering letter: "I hereby re-confirm the inflation target as 2 per cent as measured by the 12-month increase in the Consumer Prices Index (CPI). The inflation target of 2 per cent is symmetric and applies at all times." The remit attached to it, under "Price stability": "I confirm that the operational target for monetary policy remains an inflation rate of 2 per cent, measured by the 12-month increase in the Consumer Prices Index." On the duty to specify it: "The Bank of England Act 1998 (the Act) requires that I specify the definition of price stability and the government's economic policy at least once in every period of 12 months." On the Act's own words: the objectives of the Bank in relation to monetary policy are "a) to maintain price stability; and b) subject to that, to support the economic policy of His Majesty's Government, including its objectives for growth and employment." On the letter: "If inflation moves away from the target by more than 1 percentage point in either direction, I shall expect you to send an open letter to me, covering the same considerations set out above." Those considerations, listed earlier in the remit, include "the outlook for inflation and, if relevant, the reasons why inflation has moved away from the target", "the policy action the Committee is taking in response" and "the horizon over which the Committee judges it is appropriate to return inflation to the target". On repetition: "You would send a further letter if inflation is more than 1 percentage point above or below the target after three months." On what the thresholds are not: "The thresholds do not define a target range. Their function is to define the points at which I shall expect an explanatory letter from you because the actual inflation rate is appreciably away from its target." Signed RT HON RACHEL REEVES MP, Chancellor of the Exchequer.
[2] The Bank's own account of the target it is given and what it must do when it misses: Bank of England, Inflation and the 2% target. Heading: "The Government sets us a 2% inflation target", and under it: "To keep inflation low and stable, the Government sets us an inflation target of 2%." Heading: "What happens if we don't meet this target?", and under it: "If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why. So if the Consumer Prices Index (CPI) inflation rate is more than 3% or less than 1%, our Governor writes a letter to the Chancellor to explain why and they set out what we'll do to get it back to 2%." The page carries a standing heading "Inflation letters" listing the published exchanges, of which the four most recent are dated 30 April 2026, 18 December 2025, 18 September 2025 and 19 June 2025. On why a miss below the target is a miss: "But if inflation is too low, or negative, then some people may put off spending because they expect prices to fall. Although lower prices sounds like a good thing, if everybody reduced their spending then companies could fail and people might lose their jobs." Page last updated 19 August 2026.
[3] The March 2026 inflation figure and the letter it required: Bank of England, letter from the Governor to the Chancellor of the Exchequer regarding CPI inflation, 30 April 2026. Opening sentence: "On 22 April 2026, the Office for National Statistics (ONS) published data showing that twelve-month inflation in the Consumer Prices Index (CPI) was 3.3% in March." On why the letter exists: "This letter sets out the outlook for inflation and the policy action the Monetary Policy Committee (MPC) is taking to return inflation to the 2% target, along with other considerations required by the MPC's remit when inflation moves away from the 2% target by more than 1 percentage point." On the movement: "CPI inflation increased from 3.0% in February to 3.3% in March, 0.3 percentage points higher than expected at the time of the February Report." Dated 30 April 2026, addressed to The Rt Hon Rachel Reeves and signed by Andrew Bailey, Governor.
[4] What Bank Rate is, who sets it and how often: Bank of England, Interest rates and Bank Rate. Under the heading "What is Bank Rate?": "It is the core interest rate in the UK and it is our job to set it. It is the rate of interest we pay to commercial banks, building societies and financial institutions that hold money with us. It is also the rate we charge on loans we may make to them. It, therefore, affects their own lending and savings rates. For example, when we raise the Bank Rate, banks will usually increase how much they charge their customers on loans and the interest they offer on savings. And the reverse if we lower it." On the household effect: "Higher interest rates mean higher payments on many mortgages and loans, meaning people must spend more on them and less on other things." On why that reaches prices, under "How do interest rates affect inflation?": "When customers spend less, businesses are less willing or able to raise their prices. When prices don't go up so quickly, inflation falls." On the calendar: "The Monetary Policy Committee is responsible for maintaining monetary stability by keeping inflation low and stable. It meets eight times a year to decide what level of Bank Rate is needed to return inflation to - or keep it at - the 2% target over time." Published on 30 July 2026 with the July decision.
[5] The July 2026 decision, the vote, who was on each side and why: Bank of England, Bank Rate maintained at 3.75% - July 2026 Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 29 July 2026. Opening sentence: "At its meeting ending on 29 July 2026, the Monetary Policy Committee (MPC) voted by a majority of 6-3 to maintain Bank Rate at 3.75%. Three members voted to increase Bank Rate by 0.25 percentage points, to 4%." Paragraph 17: "Six members (Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli, Dave Ramsden and Alan Taylor) voted in favour of the proposition. Three members (Megan Greene, Catherine L Mann and Huw Pill) voted against the proposition, preferring to increase Bank Rate by 0.25 percentage points, to 4%." Paragraph 14, on the majority: holding Bank Rate "combined with the significant tightening of financial conditions that had occurred since the conflict started, was providing sufficient insurance against the upside risks to inflation". Paragraph 15, on the minority: these members "were less reassured on the underlying disinflationary process, were concerned that second-round effects could be material, and thought it relevant that inflation had exceeded the 2% target for more than five years", and "Further, research found that setting policy as if there were stronger second-round effects and course correcting if needed, would prove to be less costly than vice versa." On the current rate of inflation: "CPI inflation has fallen to 2.6% since the previous meeting, although it is expected to rise later this year as the effects of higher energy prices continue to pass through." On the balance of risk: "The Committee judges that the risks to the inflation outlook are tilted to the upside relative to the central projection in the July Monetary Policy Report." On each member speaking for themselves, paragraph 18: "Members set out the rationale underpinning their individual votes on Bank Rate", followed by a named paragraph from each of the nine under the headings "Votes to maintain Bank Rate at 3.75%" and "Votes to increase Bank Rate to 4%".
[6] The vote at the meeting before it: Bank of England, Bank Rate maintained at 3.75% - June 2026 Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 17 June 2026. Opening sentence: "At its meeting ending on 17 June 2026, the Monetary Policy Committee (MPC) voted by a majority of 7-2 to maintain Bank Rate at 3.75%. Two members voted to increase Bank Rate by 0.25 percentage points, to 4%."
[7] How long a change in Bank Rate takes to have its effect in the United Kingdom: Bank of England, Quarterly Bulletin 2024: About a rate of (general) interest: how monetary policy transmits. On the delay: monetary policy affects real activity, which affects prices, and "this only occurs after some delay though (especially when wages and prices are sticky), giving rise to the 'long and variable lags' of monetary policy transmission." On how long: "Table A provides additional estimates, focusing solely on peak effects (which are typically obtained 1-3 years after the shock). These findings suggest that, on average over the past few decades, a 1 percentage point increase in Bank Rate has lowered the price level by 0.3%-1.0%, while reducing real GDP by 0.5%-1.4%." On the shape of it: "First-stage transmission is typically rapid, thanks to the fast speed at which financial markets react to news, whereas the second stage takes more time." On what the first stage covers: "the transmission of Bank Rate to asset prices (like the exchange rate, and prices of stocks and bonds) and other interest rates (eg, mortgage rates)."
[8] What the Consumer Prices Index measures: Office for National Statistics, Consumer price inflation, UK: Quality and Methodology Information. On what the index is: "As a measure of price change alone, the indices should reflect the cost of buying a fixed basket of goods and services of constant quality." On the basket changing: "Additions to the basket of representative items each year are broadly matched by the number of items removed so that production costs and lags can be contained."
[9] The same vote as reported to Members of Parliament: House of Commons Library, Interest rates and monetary policy: key economic indicators, research briefing SN02802, 30 July 2026. "On 30 July, the Bank of England's Monetary Policy Committee (MPC) announced it had left interest rates unchanged at 3.75%. The MPC vote was six members voting in favour of no change and three in favour of raising rates by 0.25 of a percentage point."
[10] The Federal Reserve naming its own main instrument: Board of Governors of the Federal Reserve System, Statement on Longer-Run Goals and Monetary Policy Strategy. "The Committee's primary means of adjusting the stance of monetary policy is through changes in the target range for the federal funds rate."
[11] The European Central Bank naming its own main instrument: European Central Bank, Monetary policy. "To help keep prices stable, we need to have the right tools available. Think of a toolbox full of different tools that are used, also in combination, to help us steer inflation. Interest rates are the primary instrument that we use for our monetary policy."
[12] The four routes a change in the policy interest rate travels, and how long the full effect takes: Bank of Canada, Understanding how monetary policy works, 5 April 2021. Under the heading "Four transmission channels": "When we adjust our policy interest rate at the Bank, we don't expect immediate results. It usually takes 18 to 24 months to see the full effects. Interest rate changes affect the economy through four main channels:", followed by "commercial interest rates-what you pay on mortgages and loans and what you receive on deposits", "the Canadian dollar exchange rate", "people's expectations for inflation" and "the prices of assets such as houses, stocks and bonds". Each of the four then has its own heading. On the exchange-rate channel: "A drop in Canadian interest rates may lead to a weaker Canadian dollar. Over time, this can: make the prices for imported goods and services more expensive in Canada", and a rise "may lead to a stronger Canadian dollar" which can "make the prices for imported goods and services cheaper". On expectations: if people expect prices to rise "they may consume more now before prices go up" and "they may demand more in wages to keep up with expected higher prices". On asset prices: "When interest rates go up ... the price of assets, such as stocks and bonds, drops. People who hold these assets would therefore feel less wealthy and may be less likely to borrow and spend." On the main instrument: "Learn more about our policy interest rate-the main tool we use to control inflation." On the sequence: "The exchange rate may respond right away, but it takes longer before these changes affect spending and saving-and even longer before they affect inflation." The page carries no printed date; 5 April 2021 is the date in its own address.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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