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Bank of England Target 2.0

In: Business and Management

Submitted By adriano211
Words 928
Pages 4
'Using the information on the BOE website and other knowledge, discuss what the Bank of England should do to the base rate of interest in order to hit the inflation target of 2.0% on the CPI'.

The Bank of England’s Monetary Policy Committee has responsibility for managing monetary policy. Two ways in which it can do so is through the use of quantitative easing or by adjusting bank interest rates. Currently the bank rate is at 0.5% and has been since 2009, quantitative easing is set to £375 billion, inflation is at 2.7% where as the Bank of England’s target rate at 2.0%. In order to achieve the target rate of inflation (2.0%), the Bank of England should maintain the current base rate of 0.5% or in other words a continued loosening of the monetary policy - a low interest rate, the money supply is allowed to grow and a weak exchange rate. Through my extensive research I would make this recommendation to the Bank of England based on a number of reasons of which I shall outline. It is predicting that consumer spending per household will rise by just 1.8% in the period between now and 2018, having fallen 7.1% since 2003. However, in the short term consumer spending is forecasted to fall from 230790.96 in 2013 down to 230547.75 in 2014. Decreases in consumer spending indicate that we will need to lower interest rates to see growth in consumer spending as it is being held back fragile confidence and households are more determined to save more. If interest rates are lowered investment should increase, however, the base rate should be flexible and (most likely) be increased again as a response to prevent investment having too great an effect on inflation. Since consumer spending takes up such a large proportion of aggregate demand (60%) it is important to understand that changes will have a larger impact on inflation then any other component of AD. Forecasted estimates that...

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