Analyse The Decisions Of The Bank Of England'S Monetary Policy Committee (Mpc) Over 24 Months. Why Have They Made These Decisions? In The Uk Interest Rate Are Now Close To Zero, What Additional Steps Are Being Considered To Inject Activity And Liquidity Into The Economy?
Introduction About The Bank Of England And Its Purpose
Bank Of England
The BANK OF ENGLAND is the central bank of the United Kingdom. Sometimes known as the ‘Old Lady' of Threadneedle Street. The Bank was founded in 1694, which is nationalised on 1st March 1946 and gained independence in 1997. Standing at the centre of the United Kingdom's financial systems, the Bank is committed to promoting and maintaining monetary and financial stability to contribute and maintain healthy economy. The Bank of England‘s role and its functions change over the period. Initially it work as Government's bank and since late 18th century it work as banker's bank. Bank of England manages UK's foreign exchange and gold reserve.
The Bank has two main core purposes
1) Monetary stability.
2) Financial stability.
1) Monetary stability:
Monetary stability means stable prices and confidence in the currency. Stable prices are defined by the Government's inflation target, which the Bank seeks to meet through the decisions delegated to the Monetary Policy Committee, explaining those decisions transparently and implementing them effectively in the money markets.
2) Financial stability:
Financial stability entails detecting and reducing threats to the financial system as a whole. Such threats are detected through the Bank's surveillance and market intelligence functions. They are reduced by strengthening infrastructure, and by financial and other operations, at home and abroad, including, in exceptional circumstances, by acting as the lender of last resort.
Apart from core purpose Bank will also communicate its views and analysis its work with others, including other central bank and international organisations to improve the international monetary and financial systems. The Bank will also play its part in promoting an open and internationally competitive financial centre in the United Kingdom, using its expertise to help make the United Kingdom financial system more efficient, where such efforts would be in the public interest and provided that they do not conflict with its primary responsibilities or those of other agencies.
Monetary Policy Committee
The Bank of England Act established the Monetary Policy Committee (MPC). MPC maintain price stability and to support the government's economic policies. MPC is made up of nine members - the Governor, the two Deputy Governors, the Bank's Chief Economist, the Executive Director for Markets and four external members appointed directly by the Chancellor. The appointment of external members is designed to ensure that the MPC benefits from thinking and expertise in addition to that gained inside the Bank of England. Members serve fixed terms after which they may be replaced or reappointed. The current members in the committee are:
1) Mervyn King, Governor
2) Charles Bean, Deputy Governor
3) Paul Tucker, Deputy Governor
4) Kate Barker
5) Tim Besley
6) Spencer Dale
7) Paul Fisher
8) David Miles
9) Andrew Sentance
Monetary Policy And The Objectives Of Monetary Policy
Monetary policy stand to the action undertaken by a central bank to create the availability and cost of money and credit as a mode of helping to promote national economic goals. The monetary policy continuously regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks. Monetary policy is the means by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money and cost of money or interest rate, in order to maintain a set of goal oriented toward the growth and stability of economy.
The Bank's monetary policy objective is to provide price stability, low inflation and, to support the Government's economic objectives like employments. Price stability is defined by the Government's inflation target of 2%. Interest rates are set by the Bank's Monetary Policy Committee. The MPC sets an interest rate it judges will facilitate the inflation target to be achieved. When the Bank of England changes the official interest rate it is attempting to influence the overall level of expenditure and saving in the economy. When the amount of money spent grows more speedily than the volume of output produced will result in to the inflation. Therefore in this way changes in interest rates are used to control inflation.
Important Decisions Made By Monetary Policy Committee Over The Past 24 Months
Before we look at the important decisions of MPC over past two year we will discuss in brief why MPC had to go for certain harsh decisions? Why they want to reduced Bank rate and need to inject money into the economy? In this regard we will discuss current financial crisis.
The Financial Crisis:
As we all know that current financial crisis arise from USA. The main cause of the current financial crisis is lending money form Banks and the financial institutions into the economy through mortgage, sub-prime lending, credit facility, car loan, credit card, etc. In 1970 USA form the Community Reinvestment Act (CRA) these act also insist that equality in all citizens of USA so they can have equal standard of living among them. Under these act many people had taken loan which does not turned up to Banks and financial institutions. Hence like this problems arise into the economy. Which affect the whole world into financial disaster.
There are three causes of this financial crisis:
2) Inability of the government
3) Influence of the academic society
These are the causes which lead to credit default swap scam, this scam affects the financial institutions and Banking sector in the economy. To find the right solution all the central banks has to take certain decisions. So the Bank of England's Monetary Policy had taken following decisions. We will see the inflation in the economy how to achieve the inflation target set by Government with the help of setting Bank interest rate by Monetary Policy Committee.
Inflation/Bank Interest Rate/Consumer Prices Index/Gdp:
Inflation is an upward movement in the average level of prices. In sort ‘too many prices are chasing too few goods'. In general the prices of most goods and services tend to rise over time. The inflation target was reconfirmed by the Chancellor in March 2008 at 2%, measured by the twelve-month increase in the consumer prices index (CPI).
Consumer Prices Index inflation raised sharply through the beginning of 2008 to a tip of 5.2% in September 2008, determined by energy, food and import prices. The Consumer Price Index inflation, increase above 3% in the month of June, September and December 2008 and March 2009. From October 2008 Consumer Price Index Inflation fell back towards the target. In relation to meeting the inflation target, the Monetary Policy Committee (MPC) is also worked with supporting the Government's general economic policy objective of achieving high and stable levels of growth and employment.
The slowdown in the economy led the MPC to predict that inflation would fall well below the 2% target in the medium term. During the latter part of 2008, and into 2009, the MPC reduced Bank Rate, from 5% in September 2008 to 0.5% in March 2009. At the March 2009 MPC meeting, with Bank Rate close to zero, the Committee chose to use the Asset Purchase Facility to finance asset purchases through the issuance of central bank reserves. Although this changed the instrument of monetary policy, the objective was unchanged to meet the inflation target of 2%.
During the year, to help stabilise market interest rates in line with Bank Rate, the Bank:
1. Held a number of modification repo operations to inject extra reserves into the banking system;
2. Expanded the range within which reserves were rewarded in order to have room for the extra reserves supplied;
3. Held modification and scheduled operations to drain extra reserves injected through long-term repo operations, using Bank of England bills for the first time for such operations; and
4. Started Operational Standing Facilities to soak up frictions in the overnight money markets.
When the Bank of England is concerned about the risks of very low inflation, it cuts Bank Rate that is it reduces the price of central bank money. But interest rates cannot fall below zero. So if they are almost at zero, and there is still a significant risk of very low inflation, the Bank can increase the quantity of money in other words, inject money directly into the economy. That process is known as ‘quantitative easing'.
The Monetary Policy Committee announced in the month of march-2009 that, in addition to setting Bank Rate at 0.5%, it would start to inject money directly into the economy in regards to meet the inflation target. The objective of policy is unchanged to meet the inflation target of 2 per cent on the CPI measure of consumer prices.
The MPC boosts the supply of money by purchasing assets like Government and corporate bonds a policy often known as 'Quantitative Easing'. Instead of lowering Bank Rate to increase the amount of money in the economy, the Bank supplies extra money directly. This does not involve printing more banknotes. Instead the Bank pays for these assets by creating money electronically and crediting the accounts of the companies it bought the assets from. This extra money supports more spending in the economy to bring future inflation back to the target.
Asset Purchase Facility:
In January 2009, the Chancellor of the Exchequer authorised the Bank to set up an Asset Purchase Facility (APF) to buy high-quality assets financed by the issuance of Treasury Bills. The aim of the Facility was to improve liquidity in credit markets. The Chancellor also announced that the APF provided an additional tool that the Monetary Policy Committee (MPC) could use for monetary policy purposes. When the APF is used for monetary policy purposes, purchases of assets are financed by the Bank creating money, rather than by issuance of Treasury Bills.
The scale of asset purchases is guided firmly by the MPC'S intention to bring inflation back to the Government's 2% target. With inflation projected to fall below target, the Bank is supplying new money to boost spending in the economy.
Amount Of Asset Purchased Facility:
The Chancellor has authorised the Asset Purchase Facility to purchase up to £150 billion of assets. In recognition of the importance of supporting the flow of corporate credit, up to £50 billion of that figure can be used to purchase private sector assets. The timing and scale of asset purchases are for the MPC to decide. At its March meeting, the MPC decided that the Bank should buy £75 billion of assets in total. It is likely that most of this sum will be spent on gilts bought in the secondary market. Subsequently, the Committee decided at its meeting in May to finance a further £50 billion of asset purchases through the creation of central bank reserves. This would bring total asset purchases to be financed in this way to £125 billion.
Latest Amount Of Asset Purchased Facility:
The Asset Purchase Facility transactions are undertaken by a subsidiary company of the Bank of England - the Bank of England Asset Purchase Facility Fund Limited (BEAPFF).
Quantity of assets purchased by the creation of central bank reserves was £121,242mn. Until 23rd July 2009 and gilts purchased was £2,001mn.until 27th July 2009. as per the Bank of England's assets purchased facility information on the site.
Impact Of Asset Purchased Facility:
It will take time to assess the extent to which the MPC'S asset purchases have stimulated nominal spending. The impact is inevitably uncertain, but over time increasing the amount of money in the economy should boost spending. The MPC is monitoring the situation closely to assess how firms and households respond to the extra money injected into the economy. It will pay close attention to the growth rate of broad money, the cost and availability of corporate borrowing, measures of inflation and inflation expectations, and developments in nominal spending growth.
Other Measures To Stabilise The Economy:
BANK OF ENGLAND had taken the following measures to stabilise the economy and financial institutions.
Money Market Operations:
In addition to their role in implementing monetary policy, the Bank's market operations aim to reduce the cost of disruption to payment and liquidity services provided by commercial banks. In this context the Bank launched a number of initiatives in response to the acute pressures on financial markets and banking systems.
Special Liquidity Scheme:
In April 2008, the Bank introduced the Special Liquidity Scheme to allow banks and building societies to swap, for up to three years, high-quality currently illiquid assets for Treasury bills. Eligible assets are restricted to those on the participating institutions' balance sheets as at 31 December 2007. The aim of the Scheme is to improve the liquidity position of the banking system and contribute to confidence in financial markets. The drawdown window to access the Scheme closed (after an extension) on 30 January 2009, but the Scheme will remain in place for three years, providing participating institutions with continuing liquidity support.
Discount Window Facility:
The Special Liquidity Scheme addressed the overhang of illiquid assets on balance sheets up to the end of 2007. But financing conditions remained difficult for banks and building societies and in October 2008 the Bank introduced a permanent Discount Window Facility, as part of a series of changes to its procedures for operating in sterling money markets. The Discount Window Facility provides liquidity insurance to the banking system. It allows eligible banks and building societies to borrow gilts against a wide range of collateral — wider than that accepted in the Special Liquidity Scheme, and not limited to assets on balance sheets before a particular date.
Long-Term Repo Operations:
Since December 2007, and especially since September 2008, the Bank has increased the amount and frequency of three-month lending and has extended the range of acceptable collateral. In the October consultation paper the Bank proposed a basis for making these arrangements permanent.
Recommendation And Conclusion
Bank of England's Monetary Policy Committee had taken certain important measures to reconstruct the financial systems into the economy. As we all know that current financial crisis had badly affected our financial institutions and the systems. As per my knowledge and observations I would like suggest following recommendations.
1) Actions Against Further Uncertainties:
Initially the Bank had to focus and take actions against further uncertainties in financial institution and systems so to protect the financial institutions and systems to suffer from further any loss or problems. Therefore Bank and Government have together form a policy to create confidence in other Banks and financial institutions to start lending money to each other and into the economy.
Bank has to further focus on reformation of financial systems into the economy. MPC has to focus on reinvestment of assets, gilts, bonds and shares which they have purchased to ‘assets purchased facility'. Sound reformations are possible through partly or fully mergers and acquisitions of small firms and institutions.
3) Programme Design:
Bank should create new programmes to improve banks balance sheets. Bank has to take periodic review of there liquidity programmes and facilities. Programmes should be appropriate to the characteristics of the banking and financial institutions. Programmes should be implemented quickly, comprehensively and have a limited enrolment period.
4) Communication Stratagem:
Enhance public understanding of the Bank's role through development of a robust communication strategy. Implement a revised public communications strategy. Enhance regular engagement with financial sector.
5) Term- Assets Purchase Facility:
Bank of England's monetary policy may have to provide further facility of term-assets purchase facility to financial institutions. This mean Bank has to purchase bond, gilts and treasury bills for certain fix term, which help to solve the liquidity problems in short run.
Finally, we conclude here that in past two years Bank of England's Monetary Policy Committee had taken several important decisions to maintain the inflation target, provide help to financial institutions and economy, but due to current financial crisis all around the world it affect the economy. In regard to this MPC has to take those steps and decisions. In future they may have to go for further more different measures to reboots the economy.
1) Bank of England, about the Bank of England and its purpose. (Online) available on
Richard Roberts, Inside International Finance, ISBN 0-75281-047-2 pp119-120
2) Bank of England, about Monetary Policy Committee, overview (Online) available on
3) Bank of England, Monetary policy and its objectives, (online) available on
Richard Roberts, Inside International Finance, ISBN 0-75281-047-2 pp119-120
4) Financial crisis, lecture notes provided by MR. OMWENG MWAMBI.
5) INFLATION/BANK INTEREST RATE/CONSUMER PRICES INDEX/GDP available on
6) Quantitative easing and assets purchase facility available on
7) Other measures available on