- Created by: harrietsweetman
- Created on: 04-12-18 13:33
The monetary Policy Committee definition
committee of the bank of england which meets eight times a year to decide the offical interest rates in the UK. 9 members appointed by the government and some by the bank of England. Their job is to make a judgement on what is the appropriate level of base interest rates for the UK economy with the need to meet an inflation target of 2%. Keeps an eye on maintaining growth.
Role of Monetary policy Committee
- Monetary stability: conducting monetary policy to ensure stable prices and confidence in the currency.Uk has an inflation target of 2% set by the government. the aim is too keep the annual rate of consumer prices infklation with 1% of the target.
- finanacial stability: means overseeing financial system so that there is an efficent flow of savings and loans and condifence in fiancial institutions such as banks. depositors need to know that their savings are safe and that banks are acting responsbily. when finanacial stability breaks down there are damaging economic and social consequences.
Factors the MPC have to consider
- GDP growth and spare capacity: he rate of growth of GDP and the size of the output gap. main task to set monetary policy so that AD grows in line with productive potential.
- bank lending and consumer credit: the levels of equity withdrawl from the housing market and also data on credit card lending which support consumer demand.
- share and house prices: both are considered important in determining household weealth, which feeds through to borrowing and retail spending. MPC has no offical target for the annual rate of house price inflation been criticized for not doing enough to prevent the housing buble.
- consumer and buisness confidence: confidence surveys provide information on possible turning points in the economic cycle. 'leading indidcators'.
- growth of wages and labour costs: wages inflation might be a cause of cost push inflation so that bank of england looks carefully at what might happen to wages.
- unemployment figures: survey evidence the scale of shortage of skilled labour.
- trends in global foreign exchange markets- a weaker exchange rate could be seen as a threat to inflation becayse it raises the prices of imported goods and services. strong exhange rate might brinb down inflation but risk of economic slowdown via fall in exports.
affects of interest rates
- housing market and house prices: high interest rates increase the cost of morgages and reduce the demand for housing. will affect household wealth an put a squeeze on equity withdrawl,
- effective disposable incomes of mortagafe payers: if interest rates are high income of homeowners who have a variable raye mortgages will fall leading to a decline in purchasing power. effects if rate of change will be higher the higher the debt as higher costs of repaying debts.
- disposable income of savers: boost income of people who have payed off mortgages and who have posistive net savings in bank. but if interest is lower than inflation then the annual real reutrn will be negative.
- consumer demand for credit: higher interest rates increase costs of paying back debt on credit cards and should lead to a decrease in retail sales and consumer spending espeically on cars as bought by credit.
affects of interest rates 2
- buisness capital investment: rise in interestr rates may dampen confidence and lead to reduction in planned capital investment.
- consumer and business confidence: relationship between interest rates and buisness and consumer confidence is complex depends on economic conditions. e.g when people are worried aboyut a recession interest rate cut can boost confidence as reasures the public that the bank is alert to slump.
- exchange rate: higher interest rates lead to an increase of the exchange rate. stronger exchange rate reduces the competivivness of uk exports in overseas markets because uk exports seem more expensive when in foreign market leading to decline in exports. reduces the sterling price of imported goods and services leading to lower prices amd higher imports.
rates since 1997