Macro Economic Policies Adopted by the Bank of England

The purpose of this study is to throw some light upon the functioning of the Central Bank, The Bank of England. The study tries to go in depth and have a look at the factors that are directly responsible for the ever changing policies of the Bank. The study tries to bring to light the whole regulation and the functioning of the Bank and the way it deals with various economic pressures, like Inflation, Deflation and Interest Rates.

Any government has the power to regulate the economy of the country and not only does it regulate the economy, it has a vital role to ensure that the economic condition remains stable. It is the responsibility of the government to ensure that all the aspects of economy maintain a stable level so that the country can grow and expand. Government regulates many things in an economy including inflation, exports and imports, prices of many vital commodities, and many important economic aspects.

Government of England has entrusted the job of determining the monetary policy, in the hands of 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 a 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 cannot be refrained from. The legislation provides the government the power to instruct the bank on the interest rates issues for a limited period of time during emergency, for the sake of national interests. (How Monetary Policy Works).

The Bank of England has a monetary policy and it uses the same to regulate mechanism of the economy. Like when it decides to change the interest rate, the government is trying to check the overall expenditure of the economy. A change in interest rates is mostly used to contain inflation, which is the result of lavish expenditure by the country. The bank sets a fixed interest rate at which it lends money to financial institutions and depending on this interest rate, individual banks and other financial institutions set up their own interest rates, which apply to the whole economy. This step is of indispensable importance to the economy, as this is very widely used to contain inflation. The only purpose behind such a step is just to contain undue inflationary levels prevailing in an economy. The point to be noted here is that, this interest rate set by the Bank of England is so effective and powerful that it chips in greatly to regulate the whole economy. It affects the stock and bond prices and also influences the asset prices throughout the country. This interest rate also regulated the savings in an economy, which eventually results in capital formation and reinvestment. It is note that when interest rates are high, people prefer to invest money in government deposits that are less risky in nature than the stock markets and similarly high interest rates boost up the savings. Lower interest rates make asset and real estate prices go up, as people start ignoring conventional saving instruments and make use of the high growth ventures like shares and houses, which pushes up their prices. Interest rate change also affects exchange rates, as an increase in the interest rate in UK will yield better returns to the investors compared to their overseas ventures. The diagram given below explains better

From interest rates to inflation
Figure 1. From interest rates to inflation

The above diagram explains the concept of system regulation. It shows that the official rate, which is set by the Bank of England, influences many parts of an economy such as market rates, asset prices including the house prices, expectations, and exchange rate. This gives rise to demand, which is the sum total of domestic plus external demand, which in turn gives rise to inflationary pressure resulting in inflation, another important point shown, which deserves a mention is the relationship between the exchange rate and import prices, or the price paid for imports. As explained above, the stronger the exchange rate the lesser the price paid for imports and the weaker the currency the higher the price paid for imports. (How Monetary Policy Works)

This research paper is addressed to all the people interested in knowing how the Bank of England works and how it keeps pace with the global changes taking place around the world. Bank of England is the central bank of UK; the paper threw light upon the measures taken by the Bank of England to curtail inflation in UK and other efforts taken by the bank to ensure growth and stability in the UK. I firmly believe that the audience will agree with the facts presented in the paper, the reality has been presented in the paper with the help of research and there are no two ways about whether or not the audience will agree with the facts, I believe they will agree with the facts presented in the paper because they all the facts have been retrieved from reliable sources mentioned in the reference section of the paper.

Works Cited

“How Monetary Policy Works” bankofengland.

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NerdyRoo. (2021, November 8). Macro Economic Policies Adopted by the Bank of England. Retrieved from https://nerdyroo.com/macro-economic-policies-adopted-by-the-bank-of-england/

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"Macro Economic Policies Adopted by the Bank of England." NerdyRoo, 8 Nov. 2021, nerdyroo.com/macro-economic-policies-adopted-by-the-bank-of-england/.

1. NerdyRoo. "Macro Economic Policies Adopted by the Bank of England." November 8, 2021. https://nerdyroo.com/macro-economic-policies-adopted-by-the-bank-of-england/.


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NerdyRoo. "Macro Economic Policies Adopted by the Bank of England." November 8, 2021. https://nerdyroo.com/macro-economic-policies-adopted-by-the-bank-of-england/.

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NerdyRoo. 2021. "Macro Economic Policies Adopted by the Bank of England." November 8, 2021. https://nerdyroo.com/macro-economic-policies-adopted-by-the-bank-of-england/.

References

NerdyRoo. (2021) 'Macro Economic Policies Adopted by the Bank of England'. 8 November.

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