The inflation rate measures the annual percentage rise in the cost of living. (CPI) A rise in the inflation rate – means prices are rising at a faster rate. Summary of higher inflation In the short-run, it is more likely the Central bank will increase interest rates to moderate the inflation rate. Savers who have …
A fixed exchange rate occurs when a country keeps the value of its currency at a certain level against another currency. Often countries join a semi-fixed exchange rate, where the currency can fluctuate within a small target level. For example, the European Exchange Rate Mechanism ERM was a semi-fixed exchange rate system. Summary The idea …
Definition – Hot money flows refer to capital flows moving to countries with higher interest rates and/or expected changes in exchange rates. Example of hot money flows For international investors, there are substantial gains to be made from moving money between different countries with different interest rates. Suppose the EU and UK both have an …
Interest rates determine the amount of interest payments that savers will receive on their deposits. An increase in interest rates will make saving more attractive and should encourage saving. A cut in interest rates will reduce the rewards of saving and will tend to discourage saving. However, in the real world, it is more complicated. …
Q. How does the Bank of England decide and set interest rates? The Bank of England set the repo rate. This is sometimes known as the ‘base rate’. It is the interest rate at which commercial banks (like Lloyds and Natwest) borrow from the Bank of England. The Bank of England can control liquidity and …
UK interest rates were last raised over a decade ago – July 2007, but it is widely expected that this week the MPC will vote to raise base interest rates from their current low of 0.25%. The logic for an interest rate rise is that – inflation (3%) is above the 2% target, fall in …
Definition: The money supply measures the total amount of money in the economy at a particular time. It includes actual notes and coins and also any deposits which can be quickly converted into cash. There are different measures of the money supply. Narrow Money e.g. M0 = This is the level of notes and coins …
Readers Question: Does expansionary monetary policy, where money supply is increased, also cause a depreciation in the currency? – Since there is a surplus of the currency in the foreign exchange market. Expansionary monetary policy means policies to increase demand in the economy. Expansionary monetary policy typically will involve: Lower interest rates – to make …