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Factors Influencing the Monetary Policy - Research Paper Example

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The purpose of the study is to come out with the factors that are generally considered before taking any decision on monetary policy. The analysis deals with determining the economic factors which play a major role in establishing the monetary policy. There is also an analysis of Base-Rate decision. …
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Factors Influencing the Monetary Policy
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Download file to see previous pages 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 certain key objectives 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 can not 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 inflation target of 2% depicts the target in terms of an annual rate of inflation based on the Consumer Prices Index (CPI). The government's intention is definitely not to achieve the lowest possible inflation rate, as low inflation is supposed to be equally bad as a high one and for that matter inflation below the target of 2% is judged to be as worse as inflation above the predefined target. The inflation target is therefore very symmetrical. (How Monetary Policy Works).  ...Download file to see next pages Read More
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