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Quantitative easing and inflation - Essay Example

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Quantitative easing and inflation Contents Introduction 3 Policy adopted by the Bank of England to minimise the inflation rate 4 Impact of quantitative easing in inflation 7 Revising quantitative easing 7 Inflation or deflation 8 Effect over the government 10 Conclusion 10 References 12 Introduction Inflation is a situation where the prices of goods and services are rising more than the general level and at the same time people are losing their purchasing power (Hart, 2009, p.15)…
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Quantitative easing and inflation
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Download file to see previous pages In the year 1694, the bank was established and on 1st March 1946 it became nationalised (Sayers, 1976). It gained its operational significance in the year1997 and from then the bank can independently work on the implementation of monetary policies (Bank of england, 2013). From the year 1993 the bank started to publish its inflation report on a quarterly basis. It contains a detailed economic analysis with the inflation projections for the upcoming months (Tennant, 2009). By depending on this analysis, the monetary policy committee of the bank take several decisions based on the interest rate (Bank of England, 2013). Quantitative Easing is a strategy in monetary policy that has been adopted by several governments and central banks to ease the effect of inflation. It helps to increase the money supply by purchasing securities from government or other securities from the market (Fukasawa, 2000, p.65). As the financial institutions got flooded with capital it helps to increase the money supply which will subsequently promote to increase the lending and liquidity. Quantitative easing is used by the central banks when the interest rates have already been minimized to near 0% levels and unable to produce the desired effect (Kimura & Small, 2004, p.45). In the following research the researcher will try to understand how the “Bank of England” is trying to minimise the inflation rate and if the Quantitative Easing program will cause higher inflation in future or not (Rochon & Rochon, 2012, p.69). Policy adopted by the Bank of England to minimise the inflation rate In the month of March of the year 2013 the inflation rate of United Kingdom has been rated as 2.80. For the purpose of national statistics inflation rate has been reported to the UK office. From the past history it has been found that from the year 1989 until 2013 the average inflation rate of United Kingdom is 2.81%. In the year 1991 it has its highest point at 8.50 and the lowest was in the year 2000 rated 0.50 percentile. In this country the most important categories in the consumer price index are transport and housing, followed by water, electricity, gas and other fuels. The following chart shows the previous inflation rate in a bar chart format- The consumer price index grew by 2.8% in the current year. In spite of the large increase and decreases the CPI remain broadly flat. The central bank of UK introduced a monetary policy balloon which helps to set the interest rate to control the inflation. One needs to keep the balloon flying at a steady height of 200 meters. It is like the same as the bank’s monetary policy committee tries to make the inflation steady at 2%. The main objective of the bank’s monetary policy is to bring stability in the price, lower the inflation rate by supporting the objectives of the government for growth of the economy as well as employment. The targeted inflation rate is 2%. In the budget statement each year the Chancellor of the Exchequer announces the targeted inflation rate. The bank can change the interest rate; however in an extreme condition the government also can ask the central bank to change the inflation rate for a certain period. Depending on the consumer price index the inflation rate ...Download file to see next pagesRead More
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