Macro-Economic Policies Adopted by the Bank of England - Assignment Example

The government regulates many things in an economy including inflation, exports and imports, prices of many vital commodities, and many important economic aspects.The government of England has entrusted the job of determining the monetary policy, in the hands of the Bank of England. Bank of England looks into many other big issues. One of the most important issues is that of ensuring monetary stability in the economy, which can be achieved through a combination of stable prices of goods and services across the economy coupled with a low inflation level and level of confidence of the investors in the currency of the country.

The Bank comes out with the monetary policy in order to ensure a certain key objective like delivering price stability with a low inflation level coupled with an objective to support the Government's economic objectives of growth and employment. Price stability is taken care of, by the Government's usual inflation target of 2%. There is a need to contemplate the crucial and critical role played by price stability in achieving the aforesaid economic stability, and in providing just the right conditions for a sustainable and longer living growth in output and employment.

Chancellor of the Exchequer announces the Government's inflation target every year in the annual Budget statement. Though The 1998 Bank of England Act enables it to set interest rates independently, however, The Bank does hold accountability to the parliament and the wider public, which cannot be refrained from. The legislation provides the government with the power to instruct the bank on the interest rates issues for a limited period of time during an emergency, for the sake of national interests.

(How Monetary Policy Works) The Bank of England has a monetary policy and it uses the same to regulate the mechanism of the economy. Like when it decides to change the interest rate, the government is trying to check the overall expenditure of the economy. A change in interest rates is mostly used to contain inflation, which is the result of lavish expenditure by the country. The bank sets a fixed interest rate at which it lends money to financial institutions and depending on this interest rate, individual banks and other financial institutions set up their own interest rates, which apply to the whole economy.

This step is of indispensable importance to the economy, as this is very widely used to contain inflation. The only purpose behind such a step is just to contain undue inflationary levels prevailing in an economy. The point to be noted here is that this interest rate set by the Bank of England is so effective and powerful that it chips in greatly to regulate the whole economy. It affects the stock and bond prices and also influences the asset prices throughout the country. This interest rate also regulated the savings in an economy, which eventually results in capital formation and reinvestment.

It is noted that when interest rates are high, people prefer to invest money in government deposits that are less risky in nature than the stock markets and similarly high-interest rates boost up the savings. Lower interest rates make asset and real estate prices go up.