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Monetary policy - Essay Example

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The Monetary Policy Of The Bank Of England Name Institution Monetary Policy and how it Functions Economic stability and growth are important macroeconomic goals that must be pursued by all countries. To realize a steady and stable economic growth and development, it is important for the government through its relevant agencies to establish sound and sustainable economic policies…
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Monetary policy

Download file to see previous pages... Therefore, to realize economic stability, it is paramount for the economic policies enacted to be in correspondent with the state of the country in terms of resources and economic endowments. Two approaches are used to realize the economic goals of price stability, growth and development, and stability in the exchange rates. These two ways include monetary and fiscal policy mechanisms. While fiscal policy frameworks focus on aspects such as government expenditure, taxation, and subsidies, the monetary policy represents the stipulations enacted to regulate the flow of money in the economy. Besides, the monetary policy mechanisms are used by the financial institutions to regulate an effective interest rate. The main objective of regulating the flow of money in the economy is to stabilize the currency and control inflation within a manageable or planned level. The monetary policy is an effective aspect and framework of the Central Bank of England that impacts on the effective cost of borrowing which has a direct effect on the amount of money in circulation and consumer expenditure. The stability of the monetary policy is measured by the stable prices, stable exchange rates (confidence in the currency), and low inflation rate. All the key decisions regarding the monetary policy are made by the Monetary Policy Committee. MPC of the Bank of England The Bank of England, through its Monetary Policy Committee, attempts to regulate and influence the general economic pattern and expenditure by changing its official interest rates. This is because it is important to maintain a steady growth rate between the level of output and money expenditure in the economy so as to eliminate inflation. Through this approach, the MPC therefore desires to control inflation by adjusting interest rates either upward or downward (Cobham, 2003 p. 61). After setting the national renting rate to major financial institutions, these then affect the entire economy from building societies, trading institutions, to consumers. Besides, the interest rates set by the MPC of the Bank of England is reflected in the exchange rates markets and equity stock markets. The Bank of England's Monetary Policy Committee (MPC) charged with the responsibility of determining the interest rates was accorded the power by the Labor Government in 1997. This followed periods of high inflation rates and soaring bench mark of 15% after it was realized that ministerial interest rate control was ineffective in maintaining long-term sustainable economic stability. This was because the economic decision were clouded by political factors. The MPC of the Bank of England is a nine member committee chaired by the Governor of the Bank of England, the Deputy Governors, four appointees by the Chancellor, Chief Economist, and Executive Directors of the Market Operation. Monetary Policy Statistics (2002-2012) Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 CPI 1.3 1.4 1.4 2.0 2.3 2.3 3.6 2.2 3.3 4.5 2.7 Interests Rates 4.0 3.75 4.75 4.5 5.0 5.5 4.6 0.6 0.5 0.5 0.5 From these statistics, it is observed that the MPC of the Bank of England has been very consistent in its policies and interest rates. From 2002 to 2012, the highest inflation rate ever reported in England wass 4.5% in 2011 while the lowest inflation rate in the economy of England is 1.3% recorded in 2002. However, over this eleven year period, ...Download file to see next pagesRead More
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