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 involved in buying government bonds (in any significant quantity).

Inflation Target of ECB and Bank Of England

Both have an inflation target as the primary objective.

  • The Bank of England have a target of inflation of CPI = 2% + / – 1
  • The ECB have an inflation target of below, but close to, 2%. Therefore, the ECB is less tolerant of inflation going above the inflation target. Evidence suggests the ECB is less willing to cut interest rates than say the Fed or MPC of Bank of England. Some have criticised the ECB of having an anti-inflationary bias at the expense of unemployment.
  • A further difficulty for the ECB is that they have to consider the inflation rate for the whole Eurozone. There could be simultaneously inflationary pressures in Germany, but deflation in southern Europe.

Other Objectives of ECB and Bank of England

The Bank of England have a target of low inflation, but, they are also asked to consider wider macro economic implications

Low inflation is not an end in itself. It is however an important factor in helping to encourage long-term stability in the economy. Price stability is a precondition for achieving a wider economic goal of sustainable growth and employment. High inflation can be damaging to the functioning of the economy. Low inflation can help to foster sustainable long-term economic growth.
From: Monetary Policy at Bank of England

Also, we have:

The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment.

Monetary policy framework

By Contrast the ECB targets just inflation

“The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.”

From: ECB Monetary Policy

The ECB is of course responsible for 11 countries in the Eurozone, whereas the Bank of England is responsible for just the UK economy.

Bank of England Response in 2011.

In 2011,UK CPI inflation reached 5.2% – way above the government’s inflation target. However, the Bank of England didn’t increase interest rates. They argued that the inflation was due to temporary cost-push factors.

rpi-cpi
Source: ONS

  • Impact of devaluation
  • Rising taxes
  • Rising commodity prices.

The Bank of England argued that underlying inflation was low (e.g. wage inflation was low).

The Bank of England were more concerned about the prospect of a double dip recession and so contemplated another round of quantitative easing.

ECB Response in 2011

In 2011, EU inflation increased just above the inflation target. The ECB also felt that it was caused by cost push inflation. However, the ECB increased interest rates because they were concerned about these inflationary pressures becoming permanent and influencing future inflation expectations. This was despite the fall in wage growth and lack of underlying inflationary pressures.

source: Krugman, NYT

The Eurozone now faces a double dip recession. Growth forecasts have been slashed for 2012.
Comment
I believe the Bank of England did the right thing to ignore the temporary effects of inflation (despite complaints from savers e.t.c). Preventing a double dip recession and continued rise in unemployment is a much bigger priority for governments and Central Banks. The ECB has made many mistakes, but their insistence on targeting low inflation in Germany has contributed to a much deeper recession, especially in southern Europe.

Lender of Last Resort

The Bank of England is willing to end as lender of last resort. The ECB isn’t. The impact has been rising bond yields in the Eurozone, but UK bond yields have fallen.
Related
Originally published Jan 2009. Updated Dec 2011
By on December 9th, 2011

5 thoughts on “ECB vs Bank of England

  1. Pls explain to me, how the Bank of England can electronically create ” gilt ” currency to prop up the UK economy, and print more pounds, whereas,the European conglomerate are struggling to balance their National Budgets ?

    2. Explain to me, how the USA, since 1775, can similarly create dollars with total impunity, to pay for their Wars, and their massive debts, and continue to pursue this course without having to account for their spendthrift ways & credit cards interminably ?

    3. Explain to me, how the ” Reserve currency ” can corner the World’s Financial sector, without any assets or Gold bullion and not have to balance their budgets, and the Fed’s can with Congressional approval, and the US Constitution( 14 Amendment ) print greenbacks, whereas the rest of the World struggle to make ends meet ?

    4. Explain to me, how the World’s Economist can continue to teach this subject in Universities, and perpetuate the myths.

    5. There are much more ” facts ” which go unanswered, but I will await your illustrious response to my queries ?

  2. Fantastic post, the argument of the ECB v Bank of England is a great case study, it is so relevant in so many aspects of the problems in so many areas. Though it is important to note as to why the ECB comes to conclusion, could be fair to say that it does not factor in the ‘real’ UK environment

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