Independence of the Bank Of England
- In 1997 the Bank of England was given independence to set interest rates.
- It is argued that politicians often took political factors into consideration when setting Interest Rates e.g. before an election they could cut rates to speed growth but this may cause inflation.
- However the govt still retains some control over monetary policy
- Govt nominates the nine members of the MPC
- The govt sets an inflation target each year currently RPIX =2.5% +/-1.
In theory this could change every year, although in practice it is likely to stay the same for the foreseeable future.
Policy Objectives of Bank of England and UK Monetary Policy
- Maintain Price stability (target CPI = 2.0% +/- 1)
- In addition support the economic policy of the govt, including its objectives for growth and employment.
Notice the target doesn’t aim for 0 inflation. Deflation can actually cause problems. Low inflation can be beneficial for allowing relative prices to change and reflect changes in quality of goods.
The overriding aim is for stable prices as a precondition for high and stable growth.