Public Attitudes to Inflation and Monetary Policy - Essay Example

?INTRODUCTION The banking arena is undergoing financial turmoil. All the s have failed to predict the financial crisis which has disruptedthe monetary plans and has resulted in an epic failure of the economy. The Bank of England is the central bank of England and it is the responsible institution for assuring the free flowing of the money throughout the economy. The financial crisis has made the economy face several challenges and the Bank plans to overcome those challenges by using the quantitative ease methods to ensure free flow of the money (Ahmad, 2010). Same has hit the Bank of England as the increasing financial crisis has resulted in the increase of inflation. The rate of inflation of the economy is jumping high. Financial analysts quote this rate of inflation as an all time high. The Bank has constantly failed to maintain the rate of inflation which has been prescribed by the government (Dimsdale, 2009). The Bank may blame the cause of the increasing inflation on external factors, but the problem mainly arose because to deal with this situation the Bank started printing money. The printing of money was not backed by gold reserves held by the Bank. Apart from this the quantity of Bank notes printed was in a very large amount (IEA, 2013). The bank is of the view that it has done the right thing. By doing this the bank has breached the government instructions of maintaining a 2% inflation rate but has successfully managed to maintain an annual rate of 5-7%. The Bank claims that this policy will ease of the debt payment. EXPLAINING THE PERSPECTIVE OF THE BANK OF ENGLAND The argument of the Bank of its actions can not be catered by the common rational of an individual. This is because no rational economy would take such an action. Printing so many currency notes will prove to be a hole in the economy. Printing extra notes will always result in more inflation then before. The rise in the inflation rate will prove to be beneficial for a few of the citizens. The rise in the inflation rate will impact the individuals as an additional tax implemented on them. The individuals will feel a prominent squeeze in the prices when paying of the utility bills or consumable goods. The government has eased the individual by implementing several tax cuts by decreasing costs and fuel prices, etc (Bell, Martyn, & Stanton, 2012). The complete economy is facing a problem of rising inflation. This is causing a problem because there are financial crisis rising due to the upcoming recession. The economy needs to deal with the situations accordingly. If it fails to do so then the people of that economy would be facing huge problems. This is the reason why it has become necessary for the economy to use quantitative easing. This will raise the flow of funds within the society. By taking these actions the economy can survive the effects of recession (Anderson, Gascon, & Liu, 2010). The result of quantitative easing will be rising amounts of inflation and hence devaluing the real value of the currency. This action taken by the Bank of England will raise the inflation of the country due to the devaluation of the currency. The set of standards of the government are not being followed appropriately, in this case, and for this reason the economy has a low annual inflation rate but the instant rate of inflation is high. The debt repayment of the economy can also be done easily to reduce the debt of the economy. Quantitative ease is the process which is used to manage and reduce the debt instantly. The rationale behind this action will ensure that the economy will become successful in eliminating the debt but the currency will devalue resulting in a higher inflation rate (Breedon, Chadha, & Waters, 2012; Cobham & Kang, 2011). Any central bank which does not want inflation to occur will not use the qualitative pricing technique to cover up with the shortage of the funds. The usage of the printing of currency notes will surely result in a higher inflation rate (de Rezende, 2011). QUANTITATIVE EASING When the standard monetary policy is not giving the desired results and has become ineffective to the current financial crisis then the central bank applies an unconventional monetary policy. This unconventional monetary policy of the central bank is called the quantitative easing method (De Vita & Abbott, 2011). Quantitative easing involves the financing of the short flow of money by financing for the funds by buying back certain financial assets from commercial banks and other private institutions. This helps generate money and hence a pre determined amount of money can be printed to ensure a smooth running of the system (Fawley & Neely, 2013). The process of quantitative easing is used to ensure the free flowing of the currency notes within the economy. When a financial crisis hits an economy the banks have to use certain methods to deal with these situations. The Bank of England defends its action of using the quantitative ease technique to deal with the current financial crisis by saying that the economy had a lot of debts which required to be settled. The increasing rate of inflation was the main concern of the individuals, but as the Bank defends it to be a necessary action for running the system nothing can be done (Joyce, McLaren, & Young, 2012). The government imposed certain tax cut on the economy to ease the individuals from the rising effect of inflation. Inflation in other word can also be considered as a fixed amount of increase in the tax rate due to the changing economic situations of a society. The inflation effect comes when the price of a currency devalues and the banks need notes for the payment of that debt. To meet the need for the currency notes and the public requirements the central bank starts printing more notes only to ensure a free flow of cash flow in the economy. The printing of money if not backed by the relevant amount of assets will always result in inflation. Normally this happens when the government goes for an easy way out of the financial crisis by printing the currency notes (Joyce, Miles, Scott, & Vayanos, 2012). THE EFFECT OF QUANTITATIVE EASING ON AN ECONOMY If the economy does not intend to have a high amount of inflation rate they never adopt the option of quantitative ease. Quantitative ease is a short term solution for the financial problems. It is not a permanent solution and in later point in time it will result in more serious financial issues (Klyuev, De Imus, & Srinivasan, 2009). The quantitative easing and the implementation of the change in the monetary policy of an economy can be carried out only by the central bank which controls the amount of money notes printed and used by the economy. A central bank which is not responsible for currency distribution and does not set the standards of the monetary policy can not implement the quantitative easing system for that particular economy (Meier, 2009). INCREASE IN INFLATION Quantitative easing results in high amount of inflation rate in the economy. This happens if more amount of notes are printed then the desired amount of easing of currency notes required. This also happens if too many funds are generated by the purchase of liquid assets. Quantitative easing in certain cases also fails by the action of the bank when lending money. The quantitative easing is beneficial only if the Banks lend the money given to them by the central bank to individuals instead of hoarding it (Morgan, 2012). By increasing the supply of currency notes the real value of the currency depreciates with respect to other currencies. This means that its foreign exchange rate falls down. This factor benefits the exporters and also the debtors. Currency devaluation is very harmful for the creditors and the importers as the value of the imported goods inflate and the prices of the imported goods rise dramatically (Mortimer-Lee, 2012). PRINTING MONEY A common name of the concept of “quantitative easing” which can be used to easily explain the concept is “printing of money.” The central bank in such developed countries cannot use the printed amount of money to pay of the debts. They only use the extra notes printed to buy the government notes and bonds. Developed countries are even forbidden by the law not to directly pay the debt off by printing the money. The governments are forbidden from doing so because it is said that the excess currency notes which are published are for stimulating the economy and not to pay-off government debts (Niederjohn, Schug, & Wood, 2011; Barnett, Macallan, & Pezzini, 2010). Any economy can be threatened of an increasing inflation rate if it is printing money notes to pay off its debts. The increase in the inflation rate is a normal outcome of any economy which needs to publish currency notes in the time of recession. Certain economies even publish currency notes to avoid deflation of prices which is a threat in the times of recession (Palley, 2011). CONCLUSION The quantitative easing program will result in a higher rate of inflation in the future for the Bank of England. This is so because the economy needs to print the currency notes to deal with the current economic turmoil. The Bank is not printing the notes for the stability of the people but because the economy needs this money to pay off its debts. This will ensure the rise in the inflation rate. This action of the bank has become very necessary for the repayment of the debt but by this action the government minimum rate of increase in inflation will rise. The government has allowed the Bank an inflation rate of no more that 2%. The current rate is way higher but the annual inflation rate of the economy is not very high (Fox, 2011). The debt repayment has helped in reducing that rate. Overall the economy has become a victim of the financial crisis and it will have to raise the inflation rate keeping in view that the current monetary policy is not giving sufficient results. The economy may take a downturn if the current financial challenges which have come upon the economy are not taken care of accordingly (Fisher, 2009). If an economy which selects quantitative easing to an excessive amount or the amount of ease required is overestimated then this may cause higher inflation. If the printed money is distributed amongst the individuals this will ensure the economic stability. If the unit of production increases by the amount of money invested in the economy will be beneficial. This will be so because the rise in per unit cost will increase the value of the money and will hence cancel out the effect of inflation (Sinclair & Ellis, 2012). List of References Ahmad, S. (2010). A tale of two central banks: how the Federal Reserve and bank of England responded to the financial crisis of 2007. Available from http://krex.k-state.edu/dspace/bitstream/handle/2097/7027/SaadAhmad2010.pdf?sequence=1 [Accessed 14 April 2013] Anderson, R. G., Gascon, C. S., & Liu, Y. (2010). Doubling your monetary base and surviving: some international experience. Federal Reserve Bank of St. Louis Review, vol. 92, no. 6, pp. 481-505. Barnett, A., Macallan, C., & Pezzini, S. (2010). Public attitudes to inflation and monetary policy. Bank of England Quarterly Bulletin, Q2. 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