Define monetary stability
Monetary stability is when prices are stable by having low inflation rates and people have confidence to spend within their economy.
Who is responsible for setting Interest rates and when did they become responsible?
The Bank of England independently set the interest rates, this is because of the 1998 Bank of England Act. It also states that in extreme cases the government has the power to give instructions to the Bank of England on interest rates, but only for a limited period.
Summarise the Inflation target
The inflation target is set by the government and is announced annually in the budget statement by the Chancellor of the Exchequer. This target is based on the annual rate of inflation according to the Consumer Price Index. The UK’s target for inflation is 2% (+/-1%). If the inflation target is over 1% either side of this target the Governor of the Bank of England must write an open letter to the Chancellor explaining why the inflation targets have not been met and how this is going to be corrected.
Who are the MPC? What happens at MPC meetings?
The Monetary Policy Committee is a group of nine members (5 from the Bank of England and 4 external members appointed by the chancellor), they rate of interest is decided by the MPC. The MPC is chaired by the Governor of the Bank of England. They decide the interest rate by holding a two-day meeting every two months. Decisions are made by a vote on a ‘one person, one vote’ basis.
What is the impact of changing interest rates in relation to: a. Savings * A reduction in interest rates means there is less incentive to save and makes borrowing money more attractive, this stimulates spending within an economy. Lower interest rates can also affect Consumers’ and Firms’ cash-flow as a fall in interest rates reduces the income from savings and interest payments on loans. It is the opposite when interest is increased. b. House Prices * Lower interest rates can increase the value and prices of assets such as shares and houses. This allows existing home owners to extend their mortgages in order to finance higher consumption. Higher share prices can also increase a households wealth and can increase their propensity to spend. c. Exchange rate * Exchange rates can change very quickly, an unexpected rise in the rat of interest in