Bank of England

Category: Accounting

Introduction:

The Bank of England Act 1998 gives the bank of England responsibility for setting interest rates to meet the government's inflation target. Decisions are taken by the bank's monetary policy committee. Committee meets on a regular monthly basis. Before turning to its immediate policy decision, the committee discussed financial market; international economy; money, credit; demand and output; costs and prices.

The last two years has presented significant challenges for policymakers around the world. Here in the United Kingdom, the monetary policy framework and the open letter system has provided a valuable mechanism to explain the factors impacting on inflation in an open and transparent way. The government continue to support MPC in taking whatever steps it considers necessary to return inflation to the 2 percent target.

The contribution of the Monetary Policy Committee of the Bank of England over the last ten years to the goal of maintaining a low inflation environment in the UK has been significant. The monetary policy framework has also been broadly successful, and part of this success can be attributed to the Bank of England Act 1998. (1)

Monetary Policy Committee:

Monetary policy committee plays very important role in the economic decisions of the counter. Monetary policy is the policy that is used to contrast with fiscal policy that refers to government borrowing taxation and spending. (2)

Bank of England monetary policy committee studies the data that is link to the UK economy and also the world economy. The different economists and the regional representatives present this data to the committee. After analysing all the information the committee has to take the decision about the price stability in the country by studding the inflation targets and by setting the budget. (3)

There are nine members of the committee:

Mr. Mervyns King, Governor

Mr. Charles Bean, Deputy Governor

Mr. Paul Tucker, Deputy Governor

Mr. Kate Barker

Mr. Tim Beasley

Mr. Spencer Dale

Mr. Paul Fisher

Mr. David Miles

Mr. Andrew Sentence

The objective of any central bank is to safeguard the value of the currency in terms of what it will purchase. Rising prices – inflation – control the value of money. Monetary policy is providing a framework for non-inflationary economic growth and directed to achieving its goal. As in most other developed countries, monetary policy usually operates in the UK through influencing the price of money. However, in April 2009 the Bank's Monetary Policy Committee announced that in addition to setting Bank Rate, it would start to inject money directly into the economy. This means that the instrument of monetary policy shifts towards the quantity of money provided rather than its price and interest rate. (2, 3)

Effect of Bank of England Monetary Polices Committee Decisions In Last 24 Months

The bank of England monitory policy committee held meetings and taking decisions every month for the last 24 months. The committee meets on the regular basis for setting interest rates to meets Government's inflation target. The committee holds the meeting on 8th and 9th of April 2009. The Committee discussed financial markets developments, the international economy, money, credit, demand and output, supply, costs and prices then gives immediate policy decisions.

The Bank of England's Monetary Policy Committee maintains the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee continued with the programme, announced on 5 March, of asset purchases totalling £75 billion financed by the issuance of central bank reserves. (4)

Financial markets

At its March meeting, the committee had agreed to purchase £75 billion of asserts within the three months period. The aim of these measures was to increase the supply of money of keeping CPI inflation close to its 2.0% target. Asset purchases during the month had been broadly on track to meet the £75 billion total, around the 26.5% had been purchased. The committee planned to use asset purchases for monetary policy purposes had not been a surprise to markets. Around £2 billion of commercial paper had been purchased and £1 billion had been purchased since the committee's March meeting, funded by central bank reserves and was part of the overall £75 billion programme financed by reserve issuance. The corporate bond facility had so far made purchases of £414 million. Sterling was broadly unchanged over the month. United Kingdom equity prices had raised by around 8% during the month. There had also been a boost to equity prices from the announcements after the G20 summit at the beginning of April.

The International Economy

Over the last twelve months period for which data were available, the value of goods exports had fallen by around 20%. The G20 summit in London, had agreed to increase substantially the funds available to the IMF. These funds should support growth by increasing the funding available for countries. That meant that one potential downside risk to world demand had reduced.

Money, credit, demand and output

Several indicators were showing signs of improvements; it was possible that this turnaround in the data might prove ephemeral. There were key uncertainties relating to stock building. The volume of UK exports had risen in February, despite the weakness in world trade. These monthly numbers were volatile, but no balance they suggested that the positive contribution from the net trade to GDP growth was likely to have fallen back in the first quarter.

Supply, Costs and prices

The latest trade data showed that goods import prices had risen 7.6% in the year. Excluding the impact of past falls in oil prices, import prices had risen broadly. Labour costs had been very weak on the month. Other components of earnings had also shown further signs of weakness. The gap between regular pay and settlements had fallen to zero in recent month. Labour market had so far held up a little better than expected. (5)

Producer output prices

The prices charged by producers for start and finished products are an important influence on consumer prices. They will be influenced by the costs of production, including wages, and also the prices of imports that feed into the process. They will reflect the balance between demand and supply in the same way as consumer prices. There is a close relationship between changes in producer price inflation and consumer price inflation, and particularly consumer goods prices, though this will vary depending on factors such as the level of demand and supply.

Producer input and commodity prices

Price indices are also available for the materials used by manufacturers. Inputs are materials such as timber, fuels, metals, groceries and food materials. Of course, one firm's input is another firm's output, so the producer input price index also includes items like steel, hardware and plastics. The producer input price index weights materials and components according to their use as inputs by manufacturing firms. Many basic materials are also included in indices of commodity prices. Commodity price indices consist of what we call primary products, such as oil and timber. Producer input and commodity prices can rise and fall by large amounts. Trends in material and commodity prices are usually more volatile than the prices charged by manufacturers and retailers. This has been particularly noticeable in the recent past when consumer price inflation has been relatively low and stable. Raw materials are only a part of manufacturers' total costs, so large changes in these prices do not tend to lead to changes in manufacturers' output prices of the same magnitude. They are likely to have some impact, particularly if price changes are large and manufacturers think they will be permanent. Large one-off changes in prices of commodities like oil can have temporary effects on consumer price inflation. But only if these effects resulted in higher inflation expectations might any rise in inflation be more persistent.

Import and export prices

The MPC also looks at import and export price indices to track the effects of exchange rate changes and demand pressures in both the UK and abroad countries, and how these might affect consumer prices in the future. Exchange rate changes will lead to changes in sterling prices. If prices in foreign currency terms do not change, then an appreciation of the exchange rate will lower sterling import and export prices. The timing and extent of any fall in import and export prices might depend on the strength of demand. If demand is strong, importers might choose to increase their profit margins and perhaps sacrifice some sales rather than reduce their prices in sterling terms and conditions. Similarly, exporters might hold their prices and sacrifice demand sales. If demand is weak, importers might reduce sterling prices instantly in order to boost their sales. The MPC monitors export and import prices alongside data on import and export volumes.

Reasons to make those decisions

The latest indicators indicate that the output is following in the first quarter of 2009. So the decisions that are taken are similar to the decisions taken in the last quarter of 2008.

In inflation report the domestic demands has fallen in forth quarter of 2008. It reflects weak spending power of the people in their daily life. This reflects the poor condition of the income. So the MPC suggested that the rate of contraction in output might be starting to moderate in second quarter of 2009. There is a sharp increase in the unemployment so it is to early to say about the credit condition to come on its normal rotten.

The fall in the world trade is affecting the UK trade. The latest data shows that the international trade is still following and there is no sing of its improvement in the near future. The latest data had shown sharp falls in goods exports around the world. The profit trading for the UK trade also depends on the lower exchange rates. As well as encouraging the depreciation would encourage substitution of consumption away from imports towards home-produced outputs.

The rise in UK CPI inflation rate to 3.2% and was likely to have reflected to a significant degree. Inflation still seemed likely to fall below the target by the second half of this year, reflecting diminishing contributions from retail energy and food prices and rising spare capacity. Nominal earnings growth had been weak. MPC reassess the pressures on costs and prices from the exchange rate depreciation and from the increasing degree of spare capacity within firms and in the labor market.

The Committee had judged that a reduction in Bank Rate to 0.5% and an initial programme of asset purchases of £75 billion was appropriate in order to meet the inflation target. The Committee agreed that no further change in Bank Rate was warranted.

Around £26.5 billion of assets had been purchased and it would take a further two months to complete the programme. The bulk of the purchases had been of gilts, with smaller volumes of purchases in commercial paper and corporate bonds. The initial effects of the Committee's asset purchase programme had been encouraging. Yields had fallen by a sizeable amount following announcement of the programme, with the falls concentrated in the range of eligible maturities. Some of those falls had subsequently been reversed. It was difficult to know if the falls in yields would persist once the £75 billion programme of purchases was complete. It was possible that some of the falls would be temporary, and only last while the purchases were being made.

Alternatively, the falls in yields might increase as additional assets were purchased. There had been some early signs of improved conditions in corporate bond and commercial paper markets.

The latest money and credit data prior to the asset purchases. It had been encouraging that the three-month annualised rate of growth of money held by households and private non-financial companies had picked up since the start of the year.

Considering the level of Bank rate. The Monitory Policy Committee had agreed to review the scale and timing of the asset purchase programme each month. If the evidence warranted it, the Monitory Policy Committee could decide either to increase or reduce the programme of purchases. Though there remained a high degree of uncertainty over the appropriate scale of asset purchases necessary to keep inflation at target in the medium term, the Committee agreed that there had been no material change in the conditions that had led them to the decision last month on the necessary scale and timing of asset purchases that was required. (6)

Step taken to inject activity and liquidity into economy

The current resection seems to have a down turn more than the one last in 1980s. England Monetary policy committee seems struggling with its impact. Although committee took lots of measures to come out of it without have a long lasting effect but it is now seem working.

Monetary policy committee starts injecting money in to the economy by purchasing the security, property, bounds and shears in the private sector. Government is trying to pump in about 7.5 billion in to the economy. Not to forget the interest rates are lowest ever. It is now just 0.5%. To control the inflation rate in the household sector government is trying to control the production price by various means. As the import and export trade is more dependent on the exchange rate, it is very difficult do stable it but still they are trying to stable it.

Conclusion & Suggestions:

The economic environment in which the MPC operates in future might not be as benign as in the last decade. We are concerned, therefore, at the lack of understanding of monetary policy by the general public, especially given this potential for a less benign economic environment ahead.

We do not recommend changes to the mandate of the MPC, nor to the policy do instruments have it at its disposal. We support the symmetrical nature of the current inflation target.

We are content with the current size of the MPC. We recommend a single term for ‘external' members of the MPC of up to six years, with no reappointment. We welcome the Government's changes to the appointments process. We recommend, to prevent delays in appointing ‘external' MPC members, the creation of a confidential pool of candidates that can be drawn from at short notice. We also argue that the positions of the Governor and of the two Deputy Governors should be recruited by open advertisement as well as confidential search.

We recommend changes to enhance the transparency of the MPC, including immediate publication of a record of the votes of each MPC member after MPC decisions are released, greater transparency of individual MPC members' positions in the minutes of the MPC and further work on improving the public's understanding of monetary policy.

References:

1. http://www.bankofengland.co.uk/monetorypolicy/decisions.htm [accessed on 7th July 2009]

2. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5743042/Bank-of-Englands-Monetary-Policy-Committee-considering-expanding-quantitative-easing-to-150bn.html [accessed on 7th July 2009]

3. http://www.parliment.uk/visiting/attend/committees.cfm [accessed on 7th July 2009]

4. http://www.bankofengland.co.uk/publications/news/2009/004.htm [accessed on 10th July 2009]

5. http://www.bankofengland.co.uk/education/targettwopointzero/economy/costs_prices.htm [accessed on 10th July 2009]

6. http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2009/mpc0904.pdf