– What does the Bank of England do with the money they get from charging interest?


I understand (or think I do) that they increase/decrease interest rates to try and control inflation, but what do they actually do with the money they get? It’s just increased, so what will they do with their now increased income?

In: 0

They are a central bank. Just like money coming from thin air when they give out loans, everything paid back to them just ceases to exist.

Banks charge profit on loans and it’s their profit

They also pay you interest on savings accounts and such. So basically they make a bunch of money and pay part of it back.

The reason interest is a thing is that the value of money doesn’t stay constant over time. Interest rates are like “payment” for the use of money.

If you any sort of inflation (and growing economies do), then the cost of something like a car goes up over time. So if you want your money to be worth the same (you can buy the same car), then it needs to accrue interest. So when you store your money in the bank, the bank can use that money to make more and they *pay* you interest. If you want to buy a house with the bank’s money, they can’t make more money from it, so they *charge* you interest. But theoretically, if your economy hits the sweet spot, then how much your money is worth and how much stuff costs stay in the same range.

The Bank of England (like other reserve banks) sets the interest rate that other banks use to lend and borrow money (from them, in some cases). Reserve banks also use their funds to buy foreign currency (because you need US dollars to buy US goods, etc.), and to issue bonds (basically an IOU that you know you can trust).

So, realistically, the BOE won’t “profit” from increasing interest rates, because the increase just attempts to match the value-loss over time. If they could actually make money this way, governments wouldn’t rack up debt the way they do.