INTEREST RATE POLICY

Interest Rate Policy

Introduction

United Kingdom has maintained the interest rate at 0.5 percent for the consecutive 24th month. The main argument remains behind this decision is the economic recovery. The UK economy has emerged from the recession of 2008-09 with a strong public and private debt and high unemployment. The period of strong growth and macroeconomic stability that preceded the crisis had masked the accumulation of serious imbalances as a result of excessive reliance on debt financing and the financial sector, as well as soaring prices assets. It is essential to address these imbalances to ensure stable and sustainable recovery. The government has launched a comprehensive program and necessary fiscal consolidation and structural reforms to strengthen growth and rebalance the economy in the years to come.

Discussion

The planned consolidation of public finances is needed to ensure long term sustainability of the fiscal situation. However, its effects will be added to headwinds caused by the slow growth of real incomes and the faltering recovery in world trade. Monetary policy should maintain expansionary stance even though inflation is significantly above target, to support the recovery. The authorities of the Bank of England are at risk, on the one hand, of not doing enough to curb inflation, and secondly, to a premature expansioning of monetary policy. The Bank of England left interest rates at a record low of 0.5% and maintained its quantitative easing program, based on the creation of money to buy debt bonds at 200,000 million pounds. Member Monetary Policy Committee, David Miles, torn between joining his teammate Andrew Sentance at the time of requesting a rate hike of interest or support the comments of another partner, Adam Posen, calling for more economic stimulus. In a speech in Dublin, Miles said that economic recovery had not been normal so far and although inflation remained "uncomfortably high", gave no clues about its future.

The authorities have embarked on an ambitious and necessary fiscal adjustment and strengthening of fiscal institutions, including taking the initiative to create the appropriate Office for Budget Responsibility. It should also begin taking steps to establish a permanent budgetary framework, as the growing fiscal consolidation. The creation of the Financial Policy Committee will strengthen the macro-prudential, but further measures are needed to address problems that arise because of the automatic replenishment of banks deemed too big to fail.

Bank of England has been continuously reducing its interest rate to hamper the conditions caused by the recession. If a country has applied Expansionary monetary policy it means that available money in commercial banks has increased. This can induce more loans. This actually reduces the interest rates which has a positive effect on credit demand. The credit-financed spending on consumer goods and capital goods will be increased, which increases in effect, production and employment. The flip side of an expansionary monetary policy of the National Bank is the rise in inflation, which in turn have negative effects on economy.

The inflation targeting is a policy to keep inflation close to ...