2.4.3 Y2 Central banks and monetary policy1

Monetary Policy

The manipulation of the rate of interest, money supply, and exchange rates to influence economic activity.

Central Bank

The central bank in the UK is the Bank of England, which has the responsibility for maintaining financial stability and controlling the money supply.

Monetary Policy Committee (MPC)

A committee within the Bank of England responsible for setting interest rates to achieve the government's monetary policy objectives.

Quantitative Easing (QE)

A monetary policy where the Bank of England creates new money electronically to buy financial assets, aimed at increasing the money supply and stimulating economic activity.

Funding for Lending Scheme (FLS)

A scheme launched by the Bank of England designed to incentivize banks to lend more to the real economy.

Interest Rate Transmission Mechanism

The process by which changes in the bank rate affect aggregate demand and inflation through various channels like consumption and investment.

Inflation Target

The government's target inflation rate, which is set at 2% +/- 1%.

Exchange Rate

The value of one currency for the purpose of conversion to another, influenced by interest rates.

Forward Guidance

A monetary policy tool that involves communicating future central bank actions to influence current economic behavior.

Negative Interest Rates

A situation where central banks set nominal interest rates below zero to stimulate borrowing and spending by penalizing banks for holding cash.

Liquidity

The ease with which an asset can be converted into cash without affecting its market price.

Debt Financing

Raising capital through borrowing, typically done through the issuance of bonds or loans.

Inflation Rate

The percentage increase in the price level of goods and services over a specified period.

Monetary Base

The total amount of a currency in circulation or held in reserves at the central bank.

Open Market Operations

The buying and selling of government securities by the central bank to control the money supply.

Reserve Requirements

Regulations set by the central bank that determine the minimum reserves each bank must hold against deposits.

Economic Output

The total value of all goods and services produced in an economy over a specific period.