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Bank of England

The Central Bank of the United Kingdom. Like other central banks its key responsibilities involve: acting as the "Lender of Last Resort" (that is, to other banks who really, really, REALLY need the money); issuing currency (which can or cannot cause inflation depending on your school of economic thinking); overseeing monetary policy – that is, the power to change interest rates.

In recent years economists have broadly agreed that the role of interest rates is to control inflation – widely seen as the greatest economic evil to beset a country. (For anyone who doubts this, follow the tragic events in Zimbabwe.) When inflation rises, interest rates are increased to make money more expensive. The logic being that we will then tighten our belts rather than spend expensive money thus forcing suppliers to moderate their price increases.

When the economy needs a bit of a shot in the arm – and inflation allows – interest rates comes down. Money is then cheap to borrow and people do so with a view to making more with it than the cost of borrowing it. For example, if it costs a hedge fund 5% to borrow money off its bank but it can make 8% with it what's not to like?

These circumstances can make for bumper years for the markets and its participants enjoy – ironically – inflated remuneration on the back of it. This cycle ends – as it always does – in tears when something like the CDO crisis of the summer of 2007 occurs. The cost of money goes up and suddenly people wish they weren't borrowing it. Lots of people – which means you and me – lose money and for one year traders, etc., don't get eye-watering bonuses at Xmas. This is corrected the following year when traders, etc., get – ironically – inflated salaries, though "people" (you and me) don't get our money back.

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