Criticisms of Bank of England  

The Bank of England was given autonomy to set interest rates in 1997. The government set the Monetary Policy Committee MPC a target of inflation – 2%

For the period 1997-2008, the Bank helped preside over a long period of economic expansion. They avoided a boom and bust economic cycle – keeping inflation low. However, in 2008, the UK entered a deep recession and many feel the Bank could have done more to prevent the downturn.

  • Firstly, the Bank gave little importance to the credit boom and bust; they also did not worry too much about the boom in house prices. By focusing on CPI inflation, they ignored the underlying disequilibrium which occured in the economy.
  • Secondly, they could be criticised for keeping interest rates too high for too long. Due to temporary cost push inflation, the Bank kept interest rates over 5% even though signs of an economic downturn were appearing. In recognition of the unexpected slowdown they cut interest rates aggressively from September 2008 to record historic lows.

Support for Bank Of England

1. Their remit was inflation not housing. The MPC were given a target for inflation. With only interest rates as a tool to stabilise their economy. It was not really their job to stabilise a boom in house prices. This would have required different policies such as rationning credit in the boom.

It was difficult to forecast the speed of the downturn in the economy. The impact of the credit crunch was a global phenomenon which made monetary policy difficult.

 

This entry was posted in . Bookmark the permalink.