Inflation is defined as the increase in the general price levels in an economy over a period of time.
Inflation is defined as the increase in the general price levels in an economy over a period of time, there are a lot of factors that contribute to the inflation level in an economy, one of the many reasons is the interest rates that are prevalent in the economy. What happens is that if the interest rates are then the people would like to save more and spend less of their disposable incomes, this would lead to lower aggregate demand levels and might result in deflation, on the other hand if the interest rates are lowered then people spend more of their disposable incomes because the opportunity cost of saving is higher and they would rather spend. The CPI level according to the report in question at the given time is 1.1% and is expected to shoot up to 2%, the government’s aim is to keep the CPI level between 1-2%, that is why the bank of England in its latest meeting has decided not to tamper with the interest rate at this point of time because they run the risk of going above or below the inflation level target that they have set themselves. It is necessary to maintain the CPI level in this range only because a lot of financial calculations are based on the interest rate level and it is imperative that it is kept within this range or else the whole economy could be damaged quite considerably and the repercussions would have to be faced for a very long time. These factors play a very important role in the growth of the economy in medium as well as long term and hence they would have to be considered very carefully so that the economy is not damaged in the long term, short term negative effects would be there but that would have to be dealt with for the betterment in the long term of the economy.
The other factors in consideration were:
Demand:
The demand level was going up as the world economy over all showed signs of positive growth but still had some considerable amount of recovery to make to get back to the pre financial crisis level, households were still hesitant in spending lavishly as the economy has not fully recovered from the initial shock. Due to this decrease in consumption the companies have also decreased their level of spending on capital by almost 10%, this is one of the reasons why the interest rates cannot be increased in the economy right now as this would lead to further reduction in capital expenditures by the company and have even more adverse effects on the economy and would also contribute to further slumping and more unemployment.
GDP:
The gross domestic product is basically the total produce of the economy in monetary value terms, the report suggests that in the 3Q of this year the GDP fell by around 0.4%, there is a need to push the economy out of the recession and the a decreasing GDP is not a good sign for the economy at all. The interest rates were kept constant to promote capital expenditure and they were expected to reach 200 billion pounds through capital financing for companies through the bank. The committee also found that the economy is recovering and in august they had expected a much more substantial fall in the GDP growth rate than 0.4% which goes to show that the banks policies were working in favor of the economy. The GDP is a very important consideration in an economy because it is a vital sign of growth of for the economy and globally the markets are dependent on each other, hence a strong UK economy would be a positive sign for the rest of the world as well, if the GDP growth rate is maintained global players would be more inclined to do business with UK firms and this would result in more demand for the pound and would push up the demand hence making the exchange rate better for the economy.
Inflation:
The inflation rate for the same period of time last year was 5.2% but it has fallen quite considerably and is now 1.1% largely due to a lack of demand in the economy because of the financial crisis that the economy is facing, this could be owing to the fact that the wages have seen a downward trend in the economy because the pounds exchange value has gone down considerably and producers face considerably higher prices on the imported items. Lowering the interest rate is not in favor of the economy as this would push down the pound sterling value even further in the exchange market and would result in deepening of crisis at home. These were the considerations that were taken into account before reaching the policy decision for the 3Q, in retrospect the bank would feel that it had taken the right decision because there were dangers in increasing and decreasing the interest rates, the economy would need to do a little better then only there would be any chances of tempering with the interest rates to bring about a major change in the economy.
The other factors in consideration were:
Demand:
The demand level was going up as the world economy over all showed signs of positive growth but still had some considerable amount of recovery to make to get back to the pre financial crisis level, households were still hesitant in spending lavishly as the economy has not fully recovered from the initial shock. Due to this decrease in consumption the companies have also decreased their level of spending on capital by almost 10%, this is one of the reasons why the interest rates cannot be increased in the economy right now as this would lead to further reduction in capital expenditures by the company and have even more adverse effects on the economy and would also contribute to further slumping and more unemployment.
GDP:
The gross domestic product is basically the total produce of the economy in monetary value terms, the report suggests that in the 3Q of this year the GDP fell by around 0.4%, there is a need to push the economy out of the recession and the a decreasing GDP is not a good sign for the economy at all. The interest rates were kept constant to promote capital expenditure and they were expected to reach 200 billion pounds through capital financing for companies through the bank. The committee also found that the economy is recovering and in august they had expected a much more substantial fall in the GDP growth rate than 0.4% which goes to show that the banks policies were working in favor of the economy. The GDP is a very important consideration in an economy because it is a vital sign of growth of for the economy and globally the markets are dependent on each other, hence a strong UK economy would be a positive sign for the rest of the world as well, if the GDP growth rate is maintained global players would be more inclined to do business with UK firms and this would result in more demand for the pound and would push up the demand hence making the exchange rate better for the economy.
Inflation:
The inflation rate for the same period of time last year was 5.2% but it has fallen quite considerably and is now 1.1% largely due to a lack of demand in the economy because of the financial crisis that the economy is facing, this could be owing to the fact that the wages have seen a downward trend in the economy because the pounds exchange value has gone down considerably and producers face considerably higher prices on the imported items. Lowering the interest rate is not in favor of the economy as this would push down the pound sterling value even further in the exchange market and would result in deepening of crisis at home. These were the considerations that were taken into account before reaching the policy decision for the 3Q, in retrospect the bank would feel that it had taken the right decision because there were dangers in increasing and decreasing the interest rates, the economy would need to do a little better then only there would be any chances of tempering with the interest rates to bring about a major change in the economy.