|
Monetary policy - History
Monetary policy - Development over time
Monetary policy has developed considerably in recent years. It has also increased considerably in importance, and the formation of the Monetary Policy Committee has made it more public and prominent than ever before.
1950s and 60s
In the 1950s and 60s, monetary policy relied mainly on direct controls. Banks and other financial institutions had a variety of restrictions on what they could do. There were often limits on the amount they could lend, and mortgages were effectively rationed. In those days the Bank could exert some control on financial institutions by what was known as 'moral suasion'. This might mean the Governor or someone else approaching them directly and suggesting that they may like to change their behaviour in some way. It was a brave bank that crossed these boundaries! This was also an era of tight exchange controls. Banks and individuals had strict limits on the amounts they could change into other currencies. Travelling abroad in those days, you even had to have the amount of currency you had changed stamped in your passport! Things have changed quite a bit since then.
1970s
In the 1970s, a lot more attention was paid to monetary policy. This was partly because of the collapse of the fixed exchange rate regime (established by the Bretton Woods conference in 1944) in 1971 and the advent of floating exchange rates. However, perhaps even more importantly, inflation began to rear its ugly head in the early 70s. Oil price rises and wage disputes all combined to push inflation into realms previously unseen in that century (though this sounds a little over-dramatic, inflation rates of over 20% were serious).
In 1971, the UK moved to a much more market-related approach to monetary policy and distinctly away from the direct controls of the previous decade. This new framework was known as 'Competition and Credit Control'. Interest rates were given a greater prominence and the (quantitative) limits on lending were lifted. However, limits were re-introduced in 1973 with a scheme called the 'Supplementary Special Deposit Scheme', also known as the Corset. This name arose because as one type of money was controlled, the money growth would pop out elsewhere. We'll leave it to your imagination why this meant it was called the 'Corset'! The Corset was abolished in 1980.
1980s
In the late 1970s, the government had begun to set targets for the growth of the money supply. This was developed and formalised by the new Conservative government of Mrs Thatcher. They began to set targets for the growth of the money supply (broad money) for several years ahead. This was published under the title 'Medium Term Financial Strategy'. However, the government found it very difficult to hit these targets and in the late 1980s they began to target narrow money instead. They also looked a range of other indicators. Increasingly the exchange rate became an important target, particularly following the Louvre Accord in 1987. In 1990, the UK joined the European Exchange Rate Mechanism.
1990s
The 1990s saw the adoption for the first time of an explicit inflation target. Originally it was set at 1-4% with the aim being to get it at the lower end of the range by 1997. It was then changed to below 2.5%. The Chancellor and the Governor of the Bank would have a monthly meeting to discuss the level of interest rates. The Chancellor always had the last say though! However, the election of a Labour government in 1997 changed all that. One of the first things the new Chancellor (Gordon Brown) did was to give the Bank 'operational independence'. They were given responsibility for setting interest rates to achieve the inflation target set by the government. Monetary policy had come of age!
2000s
In 2003, the official measure of inflation changed from the RPI to the CPI and the target rate was set at 2%.
|
