Short Guide to Monetary Policy in UK
· This involves the manipulation of the Money Supply or the rate of interest by the monetary authorities.
· This used to be carried out by the government but it is now the Bank OF England which sets the interest rate.
The purpose of Monetary policy is:
1. Directly control the rate of inflation
2. Influence the level of economic activity
3. Influence the Exchange rate
The role and function of the Central Bank
1. The issuing of notes and coins. This allows the B of E to control the Supply of cash in the economy
2. The Banker of the commercial banks. E.g. Natwest will have an account at the B of E
3. Acting as a lender of last resort. If commercial banks need to give money to their customers they can always borrow from the B of E.
4. Issuing and managing government debt. The bank of England will sell Bills to the private sector to raise money for the PSNCR.
5. Set the base Interest rate which determines the Mortgage rates and other commercial interest rates
Bank of England
Finance Pages