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Monetary policy - What? Why? How?What?What is monetary policy? Monetary policy is basically the control of the money supply and interest rates to influence inflation and other macro-economic variables. The principal emphasis currently is on using interest rates, as control of the money supply was found to be very difficult in the 'monetarist era' of the early 1980s. In the past, interest rates were set by the Chancellor, but the incoming Labour government in 1997 gave the Bank of England 'operational independence'. As part of this they were given responsibility for setting interest rates to keep inflation to a target set by the government. The current target is 2% and the Monetary Policy Committee is the committee of the Bank responsible for the interest rate decision. Why?Why do we need monetary policy? Inflation is considered to be one of the key economic targets. Keeping inflation low means a stable environment for people and business, and therefore creates the optimum conditions for the best possible level of economic growth. This in turn should minimise the level of unemployment. Stable inflation helps the economy grow for long periods and avoid booms and slumps. Monetary policy is considered the most effective way to achieve this. How?How is monetary policy carried out? Setting interest rates is the responsibility of the Monetary Policy Committee. There are nine members of the MPC, four independent members and five from within the Bank. The committee is chaired by the Governor of the Bank of England. The government set an inflation target, which is confirmed in the Budget each year. The MPC meets monthly to assess the state of the economy and decide whether it is most appropriate to increase, decrease or leave interest rates the same. Intervention in the markets is then used to ensure that interest rates are maintained at the level set by the MPC. |
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