The UK's central bank. Owned outright by the UK government via HM Treasury since 1946, the Bank has a number of roles:

• It produces and issues English and Welsh bank notes (but not coins) and issues them into the economy.
• In practice it also regulates the issue of sterling bank notes in Scotland, Northern Ireland and the Crown Dependencies by requiring that deposits be made to cover the sums issued as notes by commercial banks or local governments, meaning that these note issues are akin to franchise arrangements with the Bank of England.
• It regulates the bank deposit and payment systems, all of which ultimately operate through the central bank reserve accounts that UK clearing banks are required to maintain with the Bank of England for this purpose.
• It is the ultimate sole creator of sterling as a currency, albeit it permits other commercial banks that it regulates to participate in this process.
• It regulates the UK's banks and some other economically significant financial institutions such building societies, credit unions, insurers and major investment firms.
• Through its monetary policy committee it seeks to control inflation, for which purpose it sets the base rate at which it is willing to pay on the central bank reserve accounts  of commercial banks , which then influences other interest rates in financial markets;
• Undertakes quantitative easing and quantitative tightening on behalf of HM Treasury, which indemnifies it for any profits and losses arising and must authorise all major decisions relating to these issues as a result. These activities are described as unconventional monetary policy.

The Bank of England is notionally independent of the government and HM Treasury, which owns it. For resulting issues arising see the separate entry on central bank independence.

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The Bank for International Settlements (BIS) is an international financial institution (IFI) based in Basel, Switzerland. It serves as a bank for central banks and is often referred to as the "central bank for central banks." The BIS was established in 1930 to promote monetary and financial stability.

The BIS has 63 member central banks from around the world, including the central banks of all the major economies. There is inherent bias towards developed countries in its activities as a result.

Each member central bank holds shares in the BIS and has the right to participate in its governance and decision-making processes.

In addition to providing research and support facilities to central banks and mechanism to assist cooperation between them the BIS also hosts the Basel Committee on Banking Supervision (BCBS). This develops international banking standards and guidelines, known as the Basel Accords, to promote the soundness and stability of the global banking system. The Basel III framework is the latest set of regulations introduced by the BCBS.

More recently the BIS has also hosted Financial Stability Board (FSB). This monitors and makes recommendations about the global financial system. The FSB promotes the implementation of international standards and policies to enhance financial stability and mitigate systemic risks.

The BIS is at the heart of the neoliberal project, promoting the importance of independent central banks.

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The Base Erosion and Profits Shifting programme tackled international tax abuse.

It was run by the Organisation for Economic Cooperation and Development, which delivered most of its output in 2015.

The outputs included the recommended adoption of country-by-country reporting, automatic information exchange and the disclosure of beneficial ownership as well as improvements to transfer pricing methods.

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‘Base money' is sometimes called ‘central bank money'. It comprises the currency issued by central banks in the form of notes and coins and what are called the central bank reserve account balances or central bank reserve accounts (see separate entry). These balances are the sums owed by the central bank to the commercial banks that hold accounts with that central bank as a requirement of banking regulation.

The central bank reserve accounts serve two purposes.  Firstly, they provide the mechanism by which payments from commercial banks and their customers are made to and from the government. Secondly, they are the mechanism used by commercial banks to make settlement of the liabilities that they owe each other when fulfilling the obligations that their customers' request be settled with customers of another bank.

The central bank requires that the commercial banks hold funds in their central bank reserve accounts. As a result, these accounts are always liabilities of the central bank and assets of the commercial banks. Whilst the sum each bank might hold in its central bank reserve account will vary as inter-bank settlement takes place the quantum of funds in the overall central bank reserve accounts is always under government control and is determined by its decisions on the amount it spends (which creates new central bank reserve account balances), the amount it taxes (which removes money from these accounts), and the amount it issues in bonds (which also reduces the central bank reserve account balances since those buying bonds then have a different liability owing to them by the government). As such the overall central bank reserve account balances and so the quantity of base money is under central bank control.

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The ‘base rate' of interest is set by the central bank of a jurisdiction.

The base rate is the interest rate that a central bank will pay on money deposited with it on the central bank reserve accounts that commercial banks maintain with it to facilitate the payment of inter-bank liabilities.

The significance of the base rate is that it influences the interest rates charged by the commercial banks of a jurisdiction to their customers when making loans in the currency issued by the central bank that sets that base rate.

The setting of a central bank base rate of interest for a jurisdiction is the key tool within what is called conventional monetary policy.

The central bank base rate of interest sets the base rate for interbank lending, which is then in turn used to establish the rate for other lending, on which the loan interest rate to be charged is often specified to be at a fixed percentage rate above the base rate set by the central bank.

The term base rate is only commonly used in the UK. Other central banks use different terms. For example, the European Central Bank sets two rates – its deposit facility rate (equivalent to base rate) and its marginal lending rate (used where banks can borrow with collateral).

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See Base Erosion and Profits Shifting.

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Exchange of information between the tax authorities of states can be done bilaterally or multilaterally. When done bilaterally, two main types of agreements are used. The first are Double Taxation Agreements (DTAs). The second are Tax Information Ex­change Agreements (TIEAs).

Bilateral Double Taxation Agreements and Tax Infor­mation Exchange Agreements are agreed between the two participating states: no other state is party to the agreement. In multilateral agreements more than two states are parties to the agreement. Bilateral agreements are relatively common; mul­tilateral agreements are rare, but growing in importance as a result of  recent OECD initiatives.

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The supposed existence of black holes within government finances are one of the narratives used to justify austerity .

In the commonly used narrative a black hole in government finances is supposed to be the deficit that a government creates  that might result in a borrowing requirement that it is supposedly unable to finance, resulting in the imposition of a cost upon both the current population of taxpayers and, for reasons that are not clear, their grandchildren.

In the case of a country with its own central bank and currency and which only borrows in that currency there can be no such thing as a black hole because a country of this sort can always create the money that is required to settle its debts. To describe a country such as the United Kingdom as having a black hole in its finances is, therefore, wholly incorrect.

See also household analogy.

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The Bond Market comes in two flavours: “Primary” and “Secondary”.

For non-government issuers, things are straightforward. The Primary Market is where new bonds are issued and sold to investors. The borrower raises new money at a fixed interest rate (coupon) that is acceptable to both buyer (lender) and seller (the borrower) at the time.

The secondary Market is where existing bonds are traded between dealers and/or investors. Trades occur at prices/yields that reflect prevailing conditions, which may be quite different from when the bonds were newly issued. The Bond issuer (borrower) is not involved; the borrower does not raise or repay money.

It is the same for government bonds, but we should note three things.

First, Primary issuance by a government is usually executed by an arm of the Treasury/Finance Ministry. Bonds are sold at auction, where dealers and investors bid for securities that are on offer.

Second, the government (usually its Central Bank) is also an active participant in the Secondary Market through Open Market Operations (Sale and Repurchase agreements (Repo), outright purchases or sales). These are conducted in order to keep market interest rates close to the levels desired by monetary policy makers. In recent years, this has included quantitative easing (QE) and quantitative tightening (QT).

Third, whenever the government transacts in anything (e.g. it accepts tax payments, pays wages, etc.), it has implications for what are called the Central Bank Reserve Accounts (CBRAs, which are banks' bank accounts with the Central Bank, or Bank of England).

Government bond transactions, whether Primary or Secondary, are no exception and change the aggregate level of balances in CBRAs. Indeed, day-to-day Open Market Operations are often conducted to counteract changes in CBRA balances resulting from the everyday spending/receiving of money by the government with the aim of keeping interest rates stable.

For every sale of a bond by the government (whether a Primary new issue or from its portfolio of existing bonds), CBRA aggregate balances must fall by the same amount. Interest is paid on a newly issued bond (or forgone with the sale of a bond from the portfolio), but interest paid on CBRAs is reduced correspondingly.

It is the ability to create and destroy money (in the CBRAs) either by buying or selling (redeeming or issuing) bonds that distinguishes Government bonds from non-government bonds, and it is this behaviour that means that they are not, therefore, “debt” in the conventional (private borrowing) meaning of the word.

It also means that for investors, the ability of the government to create money means that government bonds are always a credit risk-free savings vehicle, and they are unique in having that characteristic, which is why to suggest that they are like other debt makes no sense.

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The term "bond vigilantes" was almost certainly coined by financial journalists seeking a bit of drama in their otherwise humdrum reporting. The term they invented makes markets sound as if they share plots with Clint Eastwood films.

Supposedly, bond vigilantes are investors who “punish” governments they dislike by selling government bonds and driving up interest rates. As a result, it is suggested that they determine which governments are “responsible” and which deserve market retribution.

There are several problems with this story.

First, who are they?

So-called "bond vigilantes" are employed by some of the world's most prominent financial institutions, including pension funds, insurance companies, asset managers, and banks. These are not heroic outsiders standing up for truth. They are the same institutions that have profited massively from the neoliberal order over the last forty years, and in the course of their routine activities, they buy government bonds because they need safe assets in which to save funds on behalf of their clients. They then sell them again when they get spooked (which appears to happen regularly) or when they can make more money elsewhere. There is nothing noble or democratic about any of this.

Second, what do they actually do?

These traders buy and sell. They speculate on interest rates, inflation and central bank behaviour. And, when they sell bonds in large quantities, the market price of bonds falls. A falling price equals a rising yield (for an explanation, see the glossary entry on bonds). The media interprets that as markets “losing confidence in government policy”. The reality is simply that investors are making a calculated bet that they can profit from forcing up the cost of new government borrowing.

Third, how do they do it?

Traders exploit a system in which governments pretend to “borrow” their own currency from financial markets, although in reality, when a currency-issuing government sells bonds, it is not accessing money it does not have. It is, instead, swapping one form of government money (bank reserves) for another (bonds). But as long as governments maintain the fiction that they depend on these markets to fund public services, the traders hold power. They can create a sense of crisis because politicians are terrified of interest rate rises that they think they cannot control, even though they actually have the power to do so.

How, then, do traders create the impression that they might, instead, be in control? This is where the tools of highly leveraged speculation come into play. Traders do not wait around to see if prices fall. They deploy techniques that can push prices where they want them to go:

• Short selling bonds. Traders borrow bonds they don't own, sell them quickly and hope to buy them back cheaper later. Selling into the market drives prices down, creating the appearance of a confidence crisis.
• Betting through derivatives. Interest rate futures and swaps let traders wager on central bank policy, whilst credit default swaps let them bet on rising default fears, if they exist. These instruments can be leveraged many times over, magnifying tiny shifts in sentiment into large financial consequences.
• Coordinating the narrative. Institutional trades often move alongside media briefings about governments being “reckless”. The market move creates the headline. The headline reinforces the market move. The ethics are decidedly dubious.
• Leveraging every pound. By borrowing repeatedly, a fund with £1 billion can take positions worth £10 billion or more, albeit by creating considerable risk for itself.

The important point is this: none of these activities actually depletes the government's capacity to spend its own currency. They simply increase the price the government agrees to pay to maintain the illusion that it needs the markets' favour, when nothing can be further from the truth.

Fourth, what is their goal?

Profit. Nothing more. The moral language imposed around this activity is theatre. The suggestion that traders are “holding governments to account” is self-serving ideology. If bond vigilantes really cared about economic sustainability, they would not have been silent during the years of austerity that trashed public health, investment and growth. What they want is a world where governments obey the rules that preserve financial wealth over public well-being.

Fifth, why does this matter?

This all matters because the myth of the bond vigilantes has been used to enforce austerity, weaken democracy and undermine public services. Politicians claim that “the markets” will punish them if they spend to meet social and environmental needs, yet the Bank of England has shown that interest rates are not dictated by traders. They are set through monetary policy choices, and during crises, central banks buy bonds simply to keep interest rates down. The supposedly unstoppable vigilantes are always silenced whenever that happens.

Sixth, the real lesson

Bond markets only gain power when governments choose to fear them. A currency-issuing government can always pay for the services, infrastructure and care that society requires. It can always ensure that interest rates reflect social priorities rather than speculators' demands. The idea that markets sit in judgement on democracy is not an economic fact; it is a political choice.

In summary:

Bond vigilantes are not guardians of economic virtue. They are traders exploiting a system designed to give them leverage over democratic decision-making. The only way their grip loosens is when governments remember that they, not markets, are the ultimate creators of the money on which those very markets depend.

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Background

There is much confusion amongst many people about what the financial instruments that are called bonds might be. This glossary entry seeks to explain some of the issues, without entering into excessive depth.

Bonds

A bond is a promise to pay. The value of the bond represents a sum of money, called the principal, that is entrusted by a person (the bondholder) to an organisation (the bond issuer) for a fixed period of time in return for a predetermined rate of interest, usually called the coupon rate. During the life of the bond, the holder receives this fixed rate of return, usually paid once or twice a year. At the end of the agreed term, or at maturity, as it is called, the principal is repaid in full.

That describes the simple version of the bond. However, bonds come in many forms, and their economic meaning depends entirely on who issues them and why.

Who issues bonds – and why it matters

When a government or a large company issues a bond, it is normally quoted – meaning it is available for sale - on a financial market. This means it can be bought and sold after issue, and its current market price will vary depending on the supply and demand for the bond amongst savers seeking to own it.

In contrast, when a bank or building society offers what it calls a “bond,” it is not a bond in this sense at all. It is simply a fixed-term deposit, or a savings account with a fixed interest rate and a fixed term. It cannot be traded. It is not quoted on any market. It is a savings product dressed up in grander financial language.

That distinction matters because people often assume that all “bonds” are alike. They are not. A tradable bond is a financial asset with a fluctuating market value. A bank “bond” is just money on deposit.

The basic structure

In its purest form, a bond promises two things:

1. To pay a fixed rate of interest, the coupon, over the bond's lifetime.
2. To repay the original principal at maturity.

A bond issued at £100 with a 4% coupon will pay £4 a year, every year, until maturity, when the £100 is repaid. The government or company that issued it must meet those obligations, come what may.

The vast majority of bonds are structured this way.

Index-linked bonds

That said, not all bonds have fixed returns. Some are index-linked, meaning that either the interest payments, the principal, but nearly always both, are adjusted in line with inflation.

In the UK, index-linked government bonds, or “linkers” as they are often called, are adjusted by reference to the Retail Prices Index (RPI) or, more recently, the Consumer Prices Index (CPI). The purpose is to protect investors from inflation by maintaining the real value of their investment.

If prices increase by 5%, the principal amount of the bond increases by 5% and the coupon (fixed as a percentage for the life of the bond) is calculated and paid on this new, higher principal amount. This gives holders security, but it also means that when inflation spikes, the government's recorded cost of so-called “debt interest” surges, even though little extra cash has actually left the Treasury. What has changed is the future obligation to repay the bond on maturity, which might now be more expensive.

This point is routinely misunderstood. When inflation was high in 2022 and 2023, the government's reported “borrowing costs” appeared to explode. In reality, most of that was the mechanical consequence of indexation on existing bonds, and not a rise in new interest payments.

The market price and yield

The coupon on a quoted bond, say, £4 on a £100 bond, never changes. But the market price of the bond can.

If investors come to expect higher interest rates in the economy as a whole, new bonds will be issued with higher coupons. The old 4% bond then looks less attractive, so its market price falls. A new buyer might only be willing to pay £80 for it. That means the £4 coupon now represents, in simplistic terms (ignoring the time to maturity), a yield of 5% (£4/£80).

If interest rates fall, the opposite happens. The fixed £4 payment looks generous, so buyers are willing to pay more, perhaps £120. The yield therefore falls to 3.33% (£4/£120), again calculated simplistically, which is sufficient for these purposes.

This simple demonstration of changes in value relating to expected interest yield demonstrates the inverse relationship between price and yield. When bond prices go down, yields go up, and vice versa. The key point is that the government's cost does not change. It is still paying the same £4 coupon. What moves is the market's valuation of existing bonds.

To be clear about this, the “interest rate on government debt” reported in the press is not the rate the government is paying on its “debt”. It is the market yield on bonds already in circulation and the rate at which new government borrowing happens. That yield is a snapshot of what buyers and sellers think those fixed future payments are worth at that moment.

The function of bonds in the modern monetary system

This leads to the biggest misunderstanding of all: that governments issue bonds to fund their spending.

They do not. In a country with its own currency that is widely accepted, and in which its debt is denominated, and with its own central bank, as the UK has, all government spending is funded by the creation of new money by that central bank, which in the UK is the Bank of England. The government instructs its bank to make payments; the bank credits the relevant private-sector accounts, and new money is created in the process. The government's overdraft with the Bank of England is increased as a result.

Taxes then remove most of that money from circulation in the economy by reclaiming it for the government that spent it in the first place. Bonds are then issued to provide a safe home, or a savings account by any other name, for whatever remains in the economy after tax has been paid out of the money the government created. What should be clear, then, is that the government issues bonds solely to mop up the excess money supply it has created and left in the economy after taxes have been paid. This process does not fund its spending: it does instead balance its money creation process, although whether that is technically necessary is another issue altogether, not considered here.

In that case, government bonds are nothing more than savings accounts at the Bank of England, held by pension funds, banks, insurance companies, and other financial institutions, including foreign governments and banks who want a convenient way to hold sterling. They pay interest, they are safe, and they can be traded through the financial markets, all of which show what they are really for: which is to manage liquidity (or safe cash availability) in the banking and financial services system by providing the financial sector with risk-free savings accounts in which they can deposit their excess funds, which were created in the first instance by the government.

To call them “borrowing” is, therefore, misleading. The government does not need to borrow the money it itself creates. It simply offers the private sector an interest-bearing place to store that money safely.

The political and economic confusion

Because bonds are called “government debt,” it is easy to assume they represent a burden on future generations. In truth, they represent wealth in the form of savings held by those who own them. Every pound of “debt” is someone else's asset.

If you hold a government bond, you do not fear repayment. You rely on it. Pension funds depend on gilts precisely because they are the safest assets in existence.

When politicians claim the government must “tighten its belt” because of high “borrowing,” what they really mean is that they would prefer to shrink the size of government and so offer fewer bonds. It has nothing to do with the government's actual capacity to spend.

The reality

Bonds are, quite simply, the plumbing of the modern monetary system. They manage savings, stabilise markets, and provide benchmarks for interest rates. They are not borrowing in any meaningful sense.

The government does not need your money before it can spend. It spends first, taxes later, and offers bonds to absorb the difference. Those bonds are savings deposits by another name.

To describe them as debt is to mistake the government's capacity for credit creation for a household budget. And that, as with so much else in economics, is a category error that has done immense political harm.

The bond markets

A separate glossary entry discusses the technical nature of the government bond markets, why they are unlike any other debt market and why government bonds are always risk-free deposit facilities and not debt as commonly understood.

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See shell corporation.

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