Essay on Tools of The Central Banks - 841 Words

Interest rates are a tool that central banks use to implement monetary policy. They represent the percentage rate at which interest is paid by a borrower for the privilege of using money that has been lent to them and the interest can be paid at various time intervals. Higher interest rates will have an impact upon inflation and employment and could lead to a reduction in consumer spending and investment. The Bank of England meets every month to set the UK bank rate. There are nine members of the Committee and they are appraised of all the latest data on the economy and business conditions. Their task is to keep inflation below 2% but above 1% in the following 2 years. In the UK the current rate of interest, also known as the base rate,†¦show more content†¦Charlie Bean has suggested that any rises are in baby steps in order to avoid making mistakes. In other words he thinks the Bank should be cautious - this could entail raising rates soon - but at a smaller rate than has been implemented in the past, for instance at a rate of increase of 0.1% instead of the previous normal rate of 0.25%. It is generally accepted that low interest rates are inflationary and the Bank will be watching for early signs that this is happening and try to move interest rates up early to forestall it. Generally they would raise interest rates if they were concerned that inflation was on the increase in order to reduce demand and slow the rate of economic growth. At the present time there are no signs that inflation is picking up with the latest CPI figure coming in at 1.8% which may be attributable to the output gap. Interest rate movements have the largest impact for individuals on savings, mortgages and annuities, whilst for businesses it impacts the level of demand, interest on loans and the present value of assets and liabilities. Over the last 5 years savers have been badly hit by the low level of interest rates. This has been particularly hard for pensioners with savings. Higher interest rates would make it more attractive to save cash in deposit accounts as the level of interest received would be higher than at present, thus reducing the need to take on extra risk toShow MoreRelatedConventional and Unconventional Tools Used by Central Banks, A Basic Study Guide1320 Words   |  5 Pagesunconventional tools used by central banks. (a) 1. Conventional Tools: †¢ Change of its official interest rate: The third conventional method that the Central Bank uses to maintain economic stability is change of its official interest rate on the loans taken by the commercial banks from the Central bank or the rate at which the Central bank takes loans from the Commercial banks. †¢ Open Market Operations: In this conventional tool the Central bank buys and sells financial assets from banks to maintainRead MoreThe Predominant Mandate Of Central Banks Essay748 Words   |  3 PagesThe predominant mandate of central banks is to deal with inflation and keep the financial system stable under any circumstances (Ortiz, 2009), and the central banks handling the monetary policy through popular instruments are the only body who are responsible for doing so. Handa (2009) lists six most important instruments that central banks have used to run the money policy. These tools have been historically developed along with the vicissitudes of the central banks during the growth of the internationalRead MoreMonetary and Fiscal Policy Essay1508 Words   |  7 PagesMonetary Policy Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) controlling money in the economy so as to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest so as to attain a set of objectives aiming towards growth and stability of the economy. Monetary policy is said to be expansionaryRead More Monetary Policy Constraints in an Small Open and Dollarized Economy1459 Words   |  6 PagesOpen and Dollarized Economy Central Banks around the world use monetary and exchange rate policies to affect interest rates aggregate output and internal credit in the short run.[1] Nonetheless, in small open economies these tools have limited efficiency, since global markets determine interest rates. Many small economies use fixed exchange rate policies to control inflation or promote stabilization. This policy puts constraints on the use of monetary tools that increase aggregate output becauseRead MoreTaking a Look at Forward Guidance1243 Words   |  5 Pagesof the Bank of England Mark Carney implemented a strategy called ‘forward guidance’. He does not want high interest rate until the unemployment rate has fallen to 7%or below and the criteria including a quantitative project of inflation should be less than 2.5% in the medium term. The theory of forward guidance is actually a promise of future interest rate set by the central bank. It has been an important part of monetary policy; so it sai d to rescue UK economy by apply this policy. This tool is usingRead MoreThe Role of Banks in Economic Recessions1644 Words   |  7 PagesThe role of banks in economic recessions 05.05.2009 In today’s wavering global economic context, the word `crisis` is omnipresent, taking the media by assault and infringing into the population’s daily life, although many countries haven’t even officially entered recession yet. Although recession is generally referred to as a negative Gross Domestic Product growth for a period of at least two consecutive quarters, other important economicRead MoreMission and Strategy for Central Banking Systems676 Words   |  3 PagesMission and strategy What the BoE is for? As a broad sense every central bank has a primary macroeconomic focus on monetary policy which necessitates setting up price stability and in addition establishing institutional support to provide this steadiness. As only issuers of currency (which gives monopolistic power within an economy) central banks have primary obligation to establish a trust and confidence in money and financial institutions. This determines the basics of their monetary policy,Read MoreExcessive Growth Of Credit And Asset Prices763 Words   |  4 Pagesgrowing shadow banking system etc. The following essay will describe some key risks associated with an excessive increase in credit growth and asset price and some policy tools which the central bank should adopt to keep these imbalances in check. Finally, the essay will conclude with some policy advice on adoption of these tools and keeping the credit growth in check The major risk associated with excessive growth of credit and asset prices is the buildup of economic bubbles in which any asset tradesRead MoreMonetary and Fiscal Policy Essay examples1403 Words   |  6 Pagesincludes the role of the government in regulating the economical performance of a country. It also explains the different features and tools of monetary and fiscal policy and their performance when applied to the third world countries with a huge informal sector. Monetary Policy Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) taking up measures to regulate the supply of money and the rates of interest. It involves controlling money in the economy to promoteRead MoreThe Federal Reserve System And Central Banking System1592 Words   |  7 Pagesworld, the two largest central banks are the Federal Reserve (Fed) and the European Central Bank (ECB). There are many things that make these two entities similar and many things that make them different. Both are effective in their own ways, but which one is more effective. Is one superior than the other? Which central banking entity is more accountable? Looking at the structure of these entities will only help us answer the questions. When it comes down to it, which central banking system would you