The Monetary Policy Committee
The Monetary Policy Committee (MPC) is a group within the Bank of England which is responsible for deciding the short and long term course of Monetary Policy in the UK. Consisting of 9 individuals, decisions are made 8 weeks deciding how variables to ensure the countrys macroeconomic objects are achieved. The UK aim to ensure low and stable inflation with a target rate of 2% (+/-1%) combined with economic growth. Variables that can affect the level of inflation include:
Interest rates: Defined as the cost of borrowing of the reward for saving, interest rates determine the value of additional payments when taking out loans. By lowering the interest rates, investment and consumption is encouraged as the cost of borrowing falls, this is a form of expansionary or reflationary economic policy which aims to stimulate spending and growth.
Their impact extends to mortgage repayments. By decreasing the cost of borrowing, the value of housing in the UK will rise as people will become incentivised to invest in property. This will trigger the wealth effect in which consumption rises due to an increase in the value of an individual’s assets. This will cause growth demonstrated by the graph below (outward shift of Aggregate Demand). At this moment in time, interest rates are at 0.1% as growth is low due to the economic impact of COVID-19.
However, by increasing interest rates, consumption and investment will fall which causes the opposite effect. Therefore, AD will shift inwards triggering a consequent fall in real national output. This is an example of contractionary economic policy.
Quantitative Easing/Money Supply: This involves the central bank purchasing government bonds. The intention of this method is to cause a large injection which increases the money in the circular flow of income. By expanding government spending, economic activity will intensify causing growth. This has become increasingly common in the UK to stimulate and encourage growth as the influence of interest rates has fallen.
Exchange rates: Another method of stimulating growth and controlling inflation is through exchange rates. An appreciation of the pound causes a consequent rise in the price of exports and fall in the price of imports. This can cause a trade deficit which lowers growth and potentially the price level. However, a depreciation of the pound has the opposite effect, exports will be cheaper while imports will be more expensive, causing a trade surplus. However, the MPC does not use exchange rates to achieve economic aims.
The MPC ensures price stability within the economy and is separate to the government which enables the decision-making body to ensure long term security while acting in the interests of the economy, rather than the policies of a political party. They employ the levers mentioned previously to maintain the stability of the UK financial system.
