4.2.4.3 CENTRAL BANKS AND MONETARY POLICY (4.2.4 FINANCIAL MARKETS AND MONETARY POLICY)

Define monetary policy

The tools/actions used by a central bank to control the money supply, interest rates and exchange rates

What is the MPC?

Monetary policy committee - 9 members, headed by Andrew Bailey

How often does the MPC meet?

Once a month

What factors does the MPC take into consideration when making decisions?

• lead indicators (future)

• lag indicators (past)

What are the current objectives of monetary policy set by the BoE?

1. Low/stable inflation

2. Helping the UK government achieves its other macroeconomic objectives

What is the governments target for inflation? And what is it now?

Target - 2%

Now - 3.75%

Identify 4 factors considered by the MPC when setting the bank rate

• current rate of inflation

• business confidence and consumer confidence

• wage growth rate vs inflation

• level of employment/vacancies

• economic growth

Explain how changes in the exchange rate affects AD and other macroeconomic policy objectives

SPICED, WPIDEC

Link how interest rates being high, would link to the exchange rate?

If interest rate is high, reward for saving in £, increases hot money flows, increased demand for £, appreciates the £, SPICED, worsen trade balance so likely to decrease AD (AD = C + I + G + (X - M)

In the UK, the central bank is the Bank of England. It has two core functions, what are they?

1. Maintain financial stability in the monetary system

2. Help the government maintain macroeconomic stability

How is financial stability achieved in the BoE?

By the central bank acting as a lender of last resort

What does systemic risk mean?

If one bank fails, it is likely that all other banks will fail, and the market then fails

What some additional functions of a central bank?

• controlling the issues of notes and coins

• acting as the bankers bank

• acting as the governments bank

• buying and selling currency to influence the exchange rate

• liaising with overseas central banks and international organizations

In the wake of the 2008 GFC, what are some further responsibilities of the BoE?

• to promote the safety of individual financial firms

• to protect and enhance the resilience of the financial system as a whole, to prevent future financial crisis (preventing the severity)