Bank of England ensures money's core functions in economy
Nathanaël Benjamin, Executive Director for Financial Stability Strategy and Risk at the Bank of England, outlined how the central bank's activities ensure money effectively performs its three core functions in the economy. Speaking at an OMFIF event, he used this framework to offer perspectives on current policy matters.
The bedrock of trust
The Bank of England's mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability, ensuring money does its job in all situations.
Benjamin highlighted money's three core functions: a safe store of value, a reliable unit of account, and an effective medium of exchange.
For money to be a reliable store of value, it must retain its purchasing power, be stored safely, and be predictably valuable long-term.
Low and stable inflation, targeted at 2 percent by the Monetary Policy Committee, is crucial to prevent erosion of real value.
Confidence in deposit safety is also vital, supported by the regulatory framework for banks, including capital and liquidity requirements, resolution regimes, and deposit insurance, which collectively preserve trust in money as a safe store of value.
Singleness and seamless exchange
Money as a unit of account requires singleness, ensuring all forms—central bank and commercial bank money—are exchangeable at par.
The Bank's regulation and supervision uphold this, ensuring new digital monies like stablecoins remain interoperable and redeemable at par.
Finality of settlement, via the Bank's real-time gross settlement infrastructure, is also critical for payment confidence.
As a medium of exchange, money must be readily available and flow smoothly.
The Bank ensures this through prudential regulation of bank liquidity and direct provision of liquidity.
Stress testing and counter-cyclical capital requirements also support credit flow and prevent procyclical contractions.
A unifying policy lens
This framework offers a clear, unifying lens for central bank policy, moving beyond abstract concepts to practical implications.
It underscores how seemingly disparate activities, from inflation targeting to bank supervision, all serve money's essential functions.
For policymakers, this perspective highlights the interconnectedness of stability objectives and the need for comprehensive oversight.