The Bank of England has also been granted operational independence over monetary policy. The bank's Monetary Policy Committee was given sole responsibility for setting interest rates to meet the Government's stated Retail Prices Index (RPI) inflation target.

The Consumer Price Index (CPI) replaces the Retail Prices Index as the Treasury's Inflation Index. If inflation overshoots or undershoots the target by more than 1%, the Governor has to write a letter to the Chancellor of the Exchequer explaining why and how he will remedy the situation.

Functions of the Bank the Bank of England performs all the functions of a central bank. The most important of these is maintaining price stability and supporting the economic policies of the British Government thus promoting economic growth. There are two main areas which are tackled by the Bank to ensure these functions are carried out efficiently:

Monetary Stability - Stable prices and confidence in the currency are the two main criteria for monetary stability. Stable prices are maintained by making sure price increases meet the Government's inflation target. The Bank aims to meet this target by adjusting the base interest rate, which is decided by the Monetary Policy Committee

Financial Stability - Maintaining financial stability involves protection against threats to the whole financial Threats are detected by the Bank's surveillance and market intelligence functions. The threats are then dealt with through financial and other operations, both at home and abroad. In exceptional circumstances, the Bank may act as the lender of last resort by extending credit when no other institution will.