Advisers - Monetary Policy

Monetary policy is the use of interest rates and the level of the money supply to manage the economy. Interest rates always used to be set by the government (the Chancellor), but the incoming Labour government in 1997 passed control over interest rates to the Bank of England. The 'operational independence' of the Bank of England means that it can set targets for inflation and set interest rates at the level most appropriate to achieve those targets. The level is set at monthly meetings of the 'Monetary Policy Committee'. A majority decision of the Committee is all that is required to change the level of interest rates.

Monetary policy may be used either to reflate the economy or to deflate the economy. To find out more about each of these and how monetary policy changes may affect the rest of the economy follow the links below or at the foot of the page:

• Using monetary policy to reflate the economy
• Using monetary policy to deflate the economy
• The impact of monetary policy on the rest of the economy

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