monetary policy

UK unemployment threshold of 7%

UK unemployment threshold of 7%

Readers Question Why is the forward guidance threshold set at 7% unemployment and how does this affect the threshold for inflation? The MPC have a remit to target inflation of CPI = 2% +/-1. But, the MPC also consider wider issues of economic growth and unemployment. UK Real GDP is still lower than the level reached in 2008. It is an unprecedented decline in output, and actual growth and fallen well behind trend growth. Because of this the MPC have been concerned to return the…

Quantitative easing: Risks vs benefits

Quantitative easing: Risks vs benefits

Readers Question: Could you comment on This BBC programme on Q.E. The programme highlights several criticisms of Quantitative Easing, especially the Q.E. adopted by the Bank of England. Since 2009, the Bank of England’s balance sheet has quadrupled, and now a third of all government bonds are now held by Bank of England. The programme fears this is storing up future inflation and a possible loss of confidence in the bond market. Firstly, just to recap: Quantitative easing involves Central Bank creating money electronically Using this electronic money to purchase bonds (mostly government bonds) The…

Forward guidance in monetary policy

Forward guidance in monetary policy

Forward guidance is when the Central Bank announces to markets that it intends to keep interest rates at a certain level until a fixed point in the future. The aim of forward guidance is to influence long term interest rates and market expectations. For example, the Central Bank might want to boost economic activity by convincing markets that interest rates will stay low for the foreseeable future. It means that Central Banks are pledging to keep interest rates low, even if inflation starts to creep above its target. It can be…

Expansionary Monetary Policy

Expansionary Monetary Policy

Expansionary monetary policy aims to increase aggregate demand and economic growth in the economy. Expansionary monetary policy involves cutting interest rates or increasing the money supply to boost economic activity. Expansionary monetary policy could also be termed a ‘loosening of monetary policy’. It is the opposite of ‘tight’ monetary policy. When To Pursue Expansionary Monetary Policy The recession in 2008, caused the Bank of England to cut interest rates dramatically to try and boost economic recovery. The MPC of the Bank of England has an…

ECB vs Bank of England

ECB vs Bank of England

Readers Question: What are the similarities and differences between the Bank of England and the ECB? Thank you They are both responsible for controlling inflation. However, this year, the Bank of England have shown much greater flexibility and willingness to consider other objectives such as full employment and preventing recession. The ECB have been much more rigid in targeting low inflation. The Bank of England are also willing to pursue quantitative easing and increase the money supply where necessary. The ECB have promised to avoid creating money and not to get…

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Problems of Controlling Inflation

The government and central bank seek to control inflation (e.g. in UK, government has inflation target of CPI = 2%). To achieve this, the MPC of the Bank of England set interest rates to try and keep inflation low. However, in practise there are several difficulties to controlling inflation and also meeting over macro economic objectives. Readers Question b) Why, with the aid of monetary and fiscal policies, does the government often fail to achieve its main objectives of a healthy economic growth, full employment and low inflation? In theory,…

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Monetary and Fiscal Policy in the UK

Readers Question: What do you understand by the terms ‘monetary policy’ and ‘fiscal policy’? Explain with reference to a country of your choice:- a) How these policies have been used by the government to try to achieve its objectives Monetary policy is the attempt to control macro economic variables in an economy (primarily inflation) through the use of interest rates. – Monetary Policy Fiscal policy is the attempt to influence the level of economic activity through changing taxation and government spending – More on Fiscal Policy The objectives of the government…

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The MPC and setting of Interest rates in UK

Readers Question: To what extent does the government influence the monetary policy committee when they set the interest rates? The Bank of England Monetary Policy Committee (MPC) is responsible for setting interest rates and trying to achieve a target rate of inflation. In the UK, The Monetary Policy Committee has independence in setting interest rates. The government appoint members to the MPC. In theory they could appoint members who are more sympathetic to the ‘government’s point of view’. In practice they don’t. Nor do the government threaten to remove members for choosing…