Monetary policy Essay

BANK RATE

MONETARY POLICY COMMITTEE

As per the power conferred by the Bank of England Act, 1998, the Bank of England takes the decisions through Bank’s Monetary Policy Committee. One of the main objectives is setting of INTEREST RATES, which influences the INFLATION.  The committee meets every month. For November 2007 the meeting held on 7th and 8th November 2007. The members of the committee are:

1.      Mervyn King, Governor

2.      Rachel Lomax, Deputy Governor responsible for monetary policy

3.      John Gieve, Deputy Governor responsible for financial stability

4.      Kate Barker

5.      Charles Bean

6.      Tim Besley

7.      David Blanchflower

8.      Andrew Sentence

9.      Paul Tucker

The committee discussed various matters related with financial market development such as international economy, money, credit, demand & output and costs & prices.  The purpose is to whether the bank rate should be increased, decreased or unchanged which is connected with inflation. Close monitoring is viewed every month with respect to the Bank Rate for which the total of economy is based.

ARGUMENTS
There are several arguments that the Bank Rate should left unchanged this month as per the most Committee members but some members thought that immediate cut of Bank Rate is warranted. Finally it was concluded at the Committee meeting that the Bank Rate should be maintained at 5.75% only. Based on following arguments, the decision was taken.

The reduction of bank rate warrants risks centrally and rise of inflation is expected. Besides the reduction Bank Rate invites unwarranted fall of market yield curve. Hence is reduction of Bank Rate is discouraged. Though there is change in the commercial property and housing markets where there is rise in interest rate, it should not be counted since the slowdown activity noticed on the particular markets. Hence based on it, the reduction of bank rate should not be granted.

The maintaining of Bank Rate with its current level i.e. 5.75% is acceptable as slowdown activity needed to meet the inflation target with respect to GDP data. It is time to wait the GDP data meet with the project data. The GDP is slowly is increasing which is evidenced by the financial market and credit conditions on household and business activities. The inflation is in expected level. It was also expected that inflation is warranted if immediate reduction in Bank Rate is effected. Because if the inflation raises it means sudden rises in energy, food and other commodity prices which is not suggestive. And further always the inflation rate would be upward if such pressures continued.

Though Oil prices risen internationally with rise of 20%, the rise is not constant and not effected and temporary in nature. Hence many other commodity prices remain unchanged internationally. There is no remarkable change financial market with respect to share index. Hence the committee willing to move with the market expectations and movements by maintaining the same Rate in order to continue to tightening of credit conditions with balance of risks. Besides it is noticed that growth rate with keeping inflation at targeted in UK and it is stronger than expected thus Bank Rate should be maintained intact.

CONCLUSION
Out of 9 members including Governor, seven members voted in favor of existing Bank Rate 5.75% and two members only voted against and further those two members preferring the reduction 25 basis points. Since the majority prevail, 5.75% Bank Rate is final and no change for this month.