Country report on the monetary policy of a central bank in the UK - Case Study Example

COUNTRY REPORT ON THE MONETARY POLICY OF A CENTRAL BANK IN THE UK Table of Contents Table of Contents 2 Introduction 3 History of financial crisis in the UK economy 3 Financial constancy role of Bank of England 5 Monetary Policy of Bank of England 5 Legacy of financial crisis in Bank of England’s monetary policy 6 Conclusion 8 Reference list 9 Introduction Financial crisis is one of the major curses for the globalised world. Economic recessions and inflation is one of the major imitating factors in the global economics. In the current study, the researcher is going to present a national report based on monetary policy of the Bank of England. Researcher contrasted the UK financial scenario during the post 2008 recessional period. Moreover, different factors like the redundancy, credit market fluctuations and inflation of cost. On the contrary, currency exchange rates will be imposed on the trading operations. In the study, researcher has emphasised on the collective demand of the currency exchange rate in the UK. Monetary diffusion instrument of the Bank of England of the UK is stated in the current study (Alam, 2012). History of financial crisis in the UK economy Financial crisis harmed global financial market rapidly during the year 2007 to 2008. Crisis affected the developed countries rapidly. Financial crisis hit American financial market by Lehman Brother’s bankruptcy. Financial crisis is reducing the scope of housing market efficiency in the UK. Return of the investment of the housing markets are declining rapidly. Droop in housing demands harmed the economy of the UK. Institutional and individual investors are not able to recover proper return as housing estates are not able to earn profits in the time of financial crisis (Bankofengland.co.uk, 2015b). Debt interest rates are depending on potential mortgage assets. During the years of 2007 and 2008, potential and already investors are having lower ability to invest money. Financial institutions are having low investment. People at that moment of time preferred to hold liquid cash rather than investing those. This policy of the people reduced the potentials of mortgage keeping. Securities of loan payment are facing hindrance of risk potentials. In the UK many small sized banks are losing out the rate of reserve which they are unable to provide credit. Housing industry of the UK faced certain risks regarding collection of investment from money and exchange industry. Money exchange market of the UK has lost the feasibility during 2007 and 2008 period (Bankofengland.co.uk, 2015a). Credit policy of UK faced certain redundancy along with lower availability of credit. It can be denoted as the affects of the financial crisis in the economy. It is observed that HSBC, Lloyds bank, Royal Bank of Scotland, Barclays and Standard Chartered banks are having lower power of giving credit. American credit crunch increased immense pressure on the UK based financial institutions. UK based banks are unable to fulfil the lending needs in UK financial market. UK based financial institutions are developing convergence along with other industry institutions or were simply bought out (Bankofengland.co.uk, 2015a). Money creation process in the UK changed along with economic condition. During the year 2007 and 2008, the ability of lending and collecting reserves of the UK based banks has been decreased (Bankofengland.co.uk, 2015b). Lending and deposits term have very close relation with each other. Banks are having more funds to lend out among peoples as if they are able to collect more investment. Money exchange rate is based on the cumulative rate of bank rate perspective. Contemporary global economy is facing intense challenge of the inflation or recession. People are having lower scope or opportunities of career growth. However, UK economy is facing the globalised challenges that are mainly the exchange of various foreign currencies in UK pound. It is observed that 97% of the UK based banks reduced their terms of credit during the period of 2007 – 2008. Modern economy suggested that Bank of England played crucial role in developing the scenario of getting more bank deposits and aiding the member commercial banks to provide loans among clients (Jessop, 2015). Financial constancy role of Bank of England Bank of England is mainly central bank of the UK. They are responsible for development of proper strategies for mitigating challenges of financial crisis. Bank of England has developed proper shields for the clients in terms of protecting them to achieve financial stability. Innovative approaches are emerged with financial regulations for the commercial banks under the membership of Bank of England (Keaney, 2012). From the year 2013, Bank of England has imposed new regulations for developing monetary control policies. “Financial Services Act of UK 2012” developed regulatory committee “Financial Policy Committee (FPC)”. Bank of England has disseminated responsibilities of each subsidiary members in the financial market of UK to ensure more control (Schwert, 2011). Monetary Policy of Bank of England Monetary policy of Bank of England mainly increased stability formation in prices of financial instruments and currency exchange policies. In UK, globalised trading increased foreign inflow therefore commercial banks are providing the service of exchanging foreign currency on behalf of the clients. However, Bank of England being the controller of all commercial banks needs to provide the guidelines for exchanging currencies. The UK Government has imposed certain target to control inflation rate during the year 2008 and 2009. Monetary Policy Committee (MPC) has imposed certain regulations for Bank of England and other commercial banks (Shrivastava and Busch, 2013). Monetary policy of Bank of England of the UK developed a system that increases rate of money lending. Rate of lending money by the central bank will control interest rate and monetary exchange rate. During the year 2009, monetary policy committee imposed certain control of bank rate among the commercial banks. The UK based economy is raising funds with the help of purchasing of different financial assets. This is the most important quantitative measure of Bank of England for making their monetary policy more effective (Tomasic, 2011). Legacy of financial crisis in Bank of England’s monetary policy Bank of England is the major body of UK based financial market. On the contrary, financial instability of the UK economy reduced the scope of feasible monetary policy. Financial crisis hit the world during the mid half of 2007. However, during the year 2008 global economy faced highest impact as the Lehman Brothers got bankrupted. Bank of England also got such affects. Monetary policy of England is regulated by Bank of England and they are imposing various controlling measure. “Large scale asset purchases (LSAPs)” is the latest monetary control policy in England to remain their economic position (www.bankofengland.co.uk, 2015a). Bank of England has imposed quantitative easing (QE) technique in order to increase credit availability in UK based financial market. 2009 was the year of post recessional period in the world financial organisations. Bank of England modified certain monetary policy during post recessional period. total assets 2007 100 2008 125 2009 370 2010 300 2011 350 Figure 1: Bank of England policy rate contrast during 2007 to 2011 (Source: www.bankofengland.co.uk, 2015b) Asset purchase technique of Bank of England helped them to reduce the Bank Rate to 0.5% during the year 2010 to 2011. Moreover, successes of such measures are increased as the UK government arranged committee outlined certain considerable risk associated with the investment collection and debt payout ratios. Bank of England is fixed with a target of 2% medium term loans in the period of 2007 and 2008. Commercial banks of England can create medium term loans with the help of funding in purchase of assets. Commercial banks can generate required money for meeting the loan demands and inflation rate in the UK financial sector (www.bankofengland.co.uk, 2015b). Quantitative Easing reported with a purchase of more than £201.25 billion assets for Bank of England. The amount reported as 13.81% of UK GDP. Bank of England remained a as an example for the central banks of other countries in terms of asset purchasing to create flexible monetary policy. Bank of England created Federal Reserve in making the prediction of the UK based monetary policy and potential risk meeting of financial failures (www.bankofengland.co.uk, 2015a). Conclusion Bank of England has established themselves as the leaders or bench marks of other developed countries. During the year 2013, Bank of England provided clear guidance for the commercial banks future monetary policies. The monetary policy of Bank of England constituted with the contrast of bank rate and investment generation. Monetary policy of the UK faces the economic recessional risk. Bank of England implemented price stability in the financial instruments. Financial stability reported feasible exchange rate of foreign currency apart from UK pounds. Inflation affected the monetary policy concentrated on long term investment and the UK economy got certain sustainable growth. Bank of England imposed certain measures reading employment and other economic condition. Reference list Alam, A., 2012. Crisis Transmission: Global Financial Crisis. Journal of Risk Analysis and Crisis Response, 2(3), p.157. Bankofengland.co.uk, 2015a. Bank of England | About the Bank. [online] Available at: [Accessed 14 Mar. 2015]. Bankofengland.co.uk, 2015b. Bank of England | Monetary Policy. [online] Available at: [Accessed 14 Mar. 2015]. Jessop, B., 2015. Crisis construal in the North Atlantic Financial Crisis and the Eurozone crisis. Competition & Change. Keaney, M., 2012. Tackling the Financial Crisis. Political Studies Review, 10(1), pp.63-72. Schwert, G., 2011. Stock Volatility during the Recent Financial Crisis. European Financial Management, 17(5), pp.789-805. Shrivastava, P. and Busch, T., 2013. Avoiding a Global Carbon Crisis: Learning from the Financial Crisis. Thunderbird International Business Review, 55(6), pp.647-658. Tomasic, R., 2011. The financial crisis and the haphazard pursuit of financial crime. Journal of Financial Crime, 18(1), pp.7-31. www.bankofengland.co.uk, 2015a. Money creation in the modern economy. [online] Available at: [Accessed 14 March 2015]. www.bankofengland.co.uk, 2015b. Quantitative easing and other unconventional monetary policies: Bank of England conference summary. [online] Available at: [Accessed 14 March 2015]. Read More