Economic Pressure on UKs inflation and the monetary policies
The central bank of UK is the Bank of England or the old lady, which was founded in the year 1694 but nationalized in 1946. The bank regulates the financial system of UK by maintaining and controlling the fiscal and monetary policies. The banks main objective is to provide stability to the financial system of UK and maintain a healthy economy. The bank also maintains and manages the gold reserves and the foreign exchanges of United Kingdom.
Economic pressure on UKs inflation
During the recent economic crisis, the economy of UK faced the pressure and had to regulate its policies to combat the menace. At the later part of 2008, Bank of England had cut down the rate of interest to 1 and expected it to drop to about 0.5 in the successive years. In 2008, the budget deficit of UK was 5.3 of its GDP and was expected to rise in the next year to about 11.3 of GDP. The inflation rate rose to 3.6 in the year 2008, but it was expected to decline as the result of economic crisis in the recent future. The CPI of UK stood at 2.9 in the year 2009, indicating the decline due to economic collapse. The 3-month Treasury rate also dropped from 5.5 in 2008 to 1.3 in the year 2009. The economic crisis and recession had led its impact on the unemployment rate of UK, which rose to 6.3 in the later part of 2008 and is likely to grow to around 8-10 in the coming years. There were almost 2 million unemployed personnel in UK in the year 2008 and is expected to be 2.5 to 3 million in the coming years. The current account deficit of UK was US 186 billion, which was the third highest in the world. UK also has a huge trade deficit in terms of manufacturing, which needs to be sorted. The CPI had risen to 3.5 in January 2010 from 2.9 in December 2009 and the Government had targeted to keep it around 2. The Bank of England had taken some policy measures in their recent announcement regarding these issues to combat the crisis and stabilize the economy of UK.
Objectives and practice of monetary policies in UK
The main objective of Bank of England was to provide stability to the financial system of UK and maintain a healthy economy. According to the Bank, macroeconomic stability can be maintained by altering the transmission mechanism regarding the monetary policies. Due to the latest financial crisis, the supply side of the economy of UK had experienced a temporary halt, which can easily turn into permanent unless there is a strong recovery of demand in the market. But the strong recovery might also result in an economic slack whose outcome will be an unusual low inflationary rate in the economy. Similarly, a stalled economy will result in a high inflationary rate.
Mr. Paul Tucker, the Governor of Bank of England, in his speech had addressed this issue and also stated that the bank is uncomfortable about the present CPI of 3.5 in January 2010, which is short living and the outcome of rise in VAT. After the recession, the banks key policy rate might be lower and the risk-free rate might be increased for future demand regulation. Hence, to offset these higher charges, which might be imposed by the bank, the bank would set low rate of interest as that of the present rate of 0.5. The bank also claims that the interest rates might be the lowest in the history of the bank. However, before the economic crisis the interest rate used to be around 5 and it would take some time to regain that position.
Conclusion
The economy of UK had been unstable due to the recent financial crisis and recessionary effect. The supply side of the economy has been experiencing a halt with dried down demand. The unemployment rate is also rising and the employed section had experienced wage cuts. In this scenario, the Bank of England had to regulate its monetary policies, which might sound a bit harsh but the regulations are for general welfare and should be welcomed. The new policies would have significant impact in stabilizing the economy of UK and will help in balancing the rate of inflation.