Mark Carney Adjusts Bank Interest Rate Policy - Case Study Example

Read the Article: “Mark Carney Adjusts Bank Interest Rate Policy”, BBC News Business, and Make Sure That You Understand It Fully Table of Contents Table of Contents 2 Introduction 3 Changes in Monetary Policy in the UK 3 Issues Relating to the Change of the Monetary Policy 6 Conclusion 10 10 References 11 Introduction The economic conditions of the UK have been adversely affected by the global recession, which took place during the period 2008-09. In the regard, the ‘gross domestic product’ (GDP) of the country has declined due to unfavourable impact imposed on its export as well as import. Additionally, the occurrence of the global recession also negatively influenced the labour market and household savings of the nation at large (Kirby & et. al., 2014; CBI, 2012). In this respect, the UK government has adopted different fiscal policies with the intention of coping inflation and unemployment rate that have been declining in a substantial way after the recession of 2008-09. Contextually, in the year 2014, the Bank of England has used interest rate policies under the approach of ‘forward guidance’ with the aim of recovering from such issue along with developing the economy (Kirby & et. al., 2014). In this context, the essay emphasises the reasons based on which the monetary policy in the UK should be changed and the variations that might occur in the micro and macro-economic conditions. Moreover, an analysis would be conducted with the aim of identifying the issues that might arise due to the changes made in the monetary policy by the Central Bank of England. Changes in Monetary Policy in the UK The recession period, which took place during the year 2008-09, had affected the economic conditions of the global economy by a certain extent. Identifiably, the UK economy has been affected by the crisis in relation to business operations, household savings and unemployment rate among others. In this regard, The Central Bank of the UK has maintained a low banking interest rate with the aim of recovering from the crisis. The low interest rate has assisted the bank in developing confidence amid investors as well as businesses to improve their hiring along with spending perspectives. In the UK, the rate of unemployment has fallen due to improved investment functions and business operations. The low interest rate is identified as a prime source accountable for substantial fall in the rate of unemployment at around 7%. In this respect, the falling unemployment rate and developing business conditions might be responsible for building inflation pressures in future. Contextually, the public has been expecting a change in the monetary policy in the UK with the intention of recovering from the crisis conditions in an effective manner. Additionally, the improving economic scenario of the UK has increased the expectation of the public towards forming a secure and developed economy. In this similar context, the public might also expect a change in the monetary policy, so that development in other economic indicators that include wage, GDP, output gap and productivity can take place at large (BBC, 2014). Subsequently, the public witnessing the growth prospects in relation to economic conditions of the UK expect a change in the interest rate policies with the intention of developing the economy with improved productivity along with price stability. In this regard, the Central Bank of the UK has planned to increase the interest rate with the aim of ensuring that economic development is witnessed in different macro along with micro economic factors that include productivity, GDP, earnings, wage, production capacity and savings among others. Additionally, the interest rate has been intended to rise in a gradual manner, so that businesses as well as investment operations are affected to a minimum extent. The public might also expect a secured recovery of the economy after the crisis. The changes especially in the interest rates by the bank have been planned with the aim of enhancing household savings and enhancing better business investment operations. In this regard, the projected interest rate might assist in increasing household savings in the coming years as revealed in the picture below. Fig. 1: Public Sector Net Borrowing Projections for the UK and Scotland Source: (IFS, 2014). In this respect, the Central Bank has planned to change the monetary policy with the aim of improving the UK economy and also ensuring better along with sustainable growth of the economic conditions of the nation (BBC, 2014; Chan, 2014). Subsequently, it can be comprehended that the Central Bank has been planning to charge a higher rate of interest with the intention of attaining the forecasted development rate for the UK economy of around 3.4% from 2.8%. Moreover, the change in the monetary policy has been made for improving productivity along with enhancing household spending in the UK (BBC, 2014). In this present market scenario, the UK economy has been witnessed to develop in a prosperous and sustainable manner relating to the segment of businesses, investment operations and unemployment rate. In this regard, an increase in the banking interest rate has been planned to be initiated for developing productivity margin, household spending and labour wage in a significant manner (Miles, 2013). In this context, the public with the change in the monetary policy are expecting to witness better efficiency along with long-term development in the macro economic factors. In this regard, the change in the monetary policy will assist in developing the UK economy by reducing fiscal risks, minimising future uncertainty and ensuring greater financial stability (OECD, 2011). Specially mentioning, the Central Bank of the UK has planned to change the monetary policy with the aim of managing inflation, which might appear in future. Contextually, the changed policy will aid in managing price stability along with output volatility at large [1] (Bank of England, 2013). Issues Relating to the Change of the Monetary Policy The Central Bank of the UK has planned to change the monetary policy by charging a higher interest rate in order to avail quick recovery from the crisis situation in a secured along with sustainable manner. In this regard, it has been identified that the Bank of England has used the policy of ‘forward guidance’ with the intention of coping with the crisis (Contessi, 2013). The Central Bank of the UK has used the monetary policy of ‘forward guidance’ in order to cope up with the inflationary pressures that might rise due to ‘Consumer Price Inflation’ (CPI), resulting in adversely affecting the economic conditions of the UK in an immense manner (Dale, 2013; Woodford, 2013; [2] (Bank of England, 2013). ‘Forward guidance’ policy has been formulated along with implemented in most of the countries for communicating the implications of monetary policies that will be adopted in future (Contessi, 2013). The CPI index can be better understood with the help of the following pictorial illustration. Fig.2: Annual CPI Inflation Source: [2] (Bank of England, 2013). It can be affirmed that the policy of ‘forward guidance’ possesses certain limitations and accordingly, the monetary policy adopted by Bank of England might be ineffective in managing inflation and productivity rate. This can be better understood with the help of the following graphical illustration. Fig.3: Private Sector Labour Productivity Source: [2] (Bank of England, 2013). The policy of ‘forward guidance is often used as a mean of communicating important information in relation to monetary reforms that will be adopted in future. It is used as a projection tool relating to the policy reactions and in this regard, it can be apparently observed that no commitment is made by the ‘monetary policy committee’ (MNC) of the Central Bank about the implementation along with the implication of the policy in future [1] (Bank of England, 2013). Specially mentioning, the policy, which is forecasted by the Central Bank, might influence the financial markets of the UK towards experiencing price instability in an immense manner. The operations of the financial markets might get affected as the individuals associated with the financial markets may change their expectations in accordance with the policies and their implications to be adopted in future. The interest rate policy, which will be adopted in future, might influence its flexibility along with effectiveness in relation to the execution of the monetary policy. The Central Bank, in order to mitigate the problem of inflation and ensuring development in other macro-economic factors, has adopted the approach of ‘forward guidance’ policy. However, it might be an unrealistic approach on the part of the bank, as an excessive rise in the inflation rate might unfavourably affect the expectations of public immensely. Additionally, there are issues including financial instability along with asset price bubbles that might affect the commitment of the bank about future projections of interest rate (Shirai, 2013). Additionally, the Central Bank of the UK tends to plan, develop and implement effective interest rate policies in future, which might prove to be ineffective in its approach due to certain unforeseen events or shocks. These might include financial market instability, increased level of household spending, fuel as well as energy prices and unemployment rate among others [2] (Bank of England, 2013). The future MNC members might be unaware of the factors based on which a specified interest-rate trend is implemented. Subsequently, the effectiveness of the interest rate policy of the Central Bank might be affected due to irrelevant decision-making (Gersbach & Hahn, 2008). The monetary policy presented by the Central Bank of the UK is seemed to be lack of adequate information in relation to the factors that are to be considered appropriately, ensuring that the trajectory projection of the interest rate and the benefits are accomplished in an effective manner. In this regard, the shortage of explanatory monetary policy will adversely affect the confidence along with the expectations of the public (Miles, 2013). The interest rate policy adopted by the Central Bank for future can be typically viewed as an unconditional commitment, as the interest-rate path adopted by the bank might get affected due to uncertain events or blocks. Moreover, there lay certain limitations that might affect the projected interest-rate path in future, as the upcoming projection is based on economic activity along with pricing policy (Shirai, 2013; Weale, 2013). Conclusion From the above analysis, it can be comprehended that economic conditions of the UK have developed in a steady manner owing to lessen unemployment rate, increased level of investments and broader business development. The Central Bank of the UK has formulated as well as planned to implement interest rate policy with the intention of making broader development in relation to various macro-economic factors that include wages and productivity among others. In this regard, the policy of ‘forward guidance’ might support the bank in looking after broad assortment of indicators that include productivity and wages among others. However, certain issues pertaining within the aforesaid approach might restrict the financial development of the UK economy at large. References [1] Bank of England, 2013. Forward Guidance. Monetary Policy. [Online] Available at: http://www.bankofengland.co.uk/monetarypolicy/Pages/forwardguidance.aspx [Accessed March 4, 2014]. [2] Bank of England, 2013. Monetary Policy Trade-Offs and Forward Guidance. Publications. [Online] Available at: http://www.bankofengland.co.uk/publications/Documents/inflationreport/2013/ir13augforwardguidance.pdf [Accessed March 4, 2014]. BBC, 2014. Mark Carney Adjusts Bank Interest Rate Policy. News. [Online] Available at: http://www.bbc.com/news/business-26153122 [Accessed March 4, 2014]. CBI, 2012. Subdued Prospects for Growth. UK Economic Outlook. [Online] Available at: http://www.cbi.org.uk/media/1754067/uk_economic_outlook_quarterly_sep_2012.pdf [Accessed March 4, 2014]. Chan, S. P., 2014. Interest rates could rise sooner than expected, says Martin Weale. Finance. [Online] Available at: http://www.telegraph.co.uk/finance/bank-of-england/10651720/Interest-rates-could-rise-sooner-than-expected-says-Martin-Weale.html [Accessed March 4, 2014]. Contessi, S., 2013. Forward Guidance 101B: A Roadmap of the International Experience. Publications. [Online] Available at: http://research.stlouisfed.org/publications/es/13/ES_28_2013-10-16.pdf [Accessed March 4, 2014]. Dale, S., 2013. Spencer Dale: Inflation Targeting and the Monetary Policy Committee’s Forward Guidance. Review. [Online] Available at: http://www.bis.org/review/r131018i.pdf?frames=0 [Accessed March 4, 2014]. Gersbach, H. & Hahn, V., 2008. Forward Guidance for Monetary Policy: Is it Desirable? Economics Working Paper Series. [Online] Available at: http://www.cer.ethz.ch/research/wp_08_84.pdf [Accessed March 4, 2014]. IFS, 2014. Observation: Reflections on Current Events. Publications. [Online] Available at: http://www.ifs.org.uk/publications/7124 [Accessed March 4, 2014]. Kirby, S. & et. al., 2014. Prospects for the UK Economy. Media. [Online] Available at: http://niesr.ac.uk/media/prospects-uk-economy-11749#.UxaiYOOSz-s [Accessed March 4, 2014]. Miles, D., 2013. Monetary Policy and Forward Guidance in the UK. Publications. [Online] Available at: http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech681.pdf [Accessed March 4, 2014]. OECD, 2011. OECD Economic Surveys United Kingdom. Overview. [Online] Available at: http://www.oecd.org/eco/surveys/47319830.pdf [Accessed March 4, 2014]. Shirai, S., 2013. Monetary Policy and Forward Guidance in Japan. Bank of Japan. [Online] Available at: http://www.boj.or.jp/en/announcements/press/koen_2013/data/ko130921a1.pdf [Accessed March 4, 2014]. Weale, M., 2013. Forward Guidance and its Effects. Speech. [Online] Available at: http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech697.pdf [Accessed March 4, 2014]. Woodford, M., 2013. Forward Guidance by Inflation-Targeting Central Banks. Columbia University. [Online] Available at: http://www.columbia.edu/~mw2230/RiksbankIT.pdf [Accessed March 4, 2014]. Read More