26) The Bank of England

Question 1

what are the Bank of England’s main roles, ( Ultimately these roles and responsibilities can be linked to the functions of money,)

Answer 1

1. The Bank of England ensures that different economic agents can use money as a medium of exchange. They produce banknotes and oversee many of the other payment methods (e.g. debit cards/credit cards)
2. The Bank of England ensures that UK money can be used as a store of value. They regulate the banking system and at least partially guarantee the deposits that different economic agents keep in this system.
3. The Bank of England is tasked by the government to ensure that money remains the most effective measure of value in the UK. It achieves this by using monetary to try and maintain stable prices in the economy
4. The Bank of England is responsible for ensuring money can be used as a standard of deferred payment. In common with roles 1 and 2, this involves overseeing and regulating the wider financial sector

Question 2

summary of main role of Bank of England

Answer 2

To sum up: the main role of the Bank of England is to keep the whole UK money and financial system stable. It does this through carrying out monetary policy for the government and regulating the financial sector.

Question 3

what Authorities are involved in Regulation

Answer 3

The PRA (Prudential Regulation Authority)

Financial Conduct Authority (FCA)

Question 4

what is the Prudential Regulation Authority

Answer 4

is a sub-section of the Bank of England. This supervises over 1,500 institutions including banks, building societies, credit unions, insurers and investment firms. To do so it sets a series of rules that each of these businesses must follow. As part of the Bank of England the objective of the PRA is to ensure that firms act safely and reduce the chance of getting into financial difficulty.

Question 5

what does the Financial Conduct Authority do?

Answer 5

which oversees about 50,000 financial services companies, mainly involved with providing credit to consumers

Question 6

what is monetary policy for? how is it carried out?

Answer 6

The Bank of England is tasked by the government to ensure that the UK inflation rate is within 1% (+ or -) of the government’s stable prices target i.e. 2% inflation. In order to meet this the Bank of England uses 2 main tools: i) interest rates changes (decided by the MPC, Monetary Policy Committee) ii) quantitative easing. Although the inflation target is the Bank’s first and foremost target it also plays a role in helping the government achieve other macro objectives, e.g. increasing the money supply to help growth. QE is designed primarily to tackle deflation risks but it may also boost government plans for growth. However, it’s important to know than the Bank of England is independent- the government cannot dictate to it- the Bank of England is responsible to the UK economy, not a political agenda.

Question 7

why is regulation in the financial sector controversial

Answer 7

Regulation of the financial sector is a very controversial area. If the regulation is too loose, the financial sector takes excessive risks, often endangering the finances of households and businesses. If the regulation is too tight, the UK will finance sector becomes uncompetitive internationally, resulting in job losses and lower AD. Good regulation helps to maintain consumer and business confidence. Equally, overly tight regulations may make it difficult for economic agents to access finance, slowing the growth of AD, SRAS and LRAS. The Bank of England has to get the balance right. In the past, their main downfall has been regulatory capture; this occurs when the regulated (e.g. the banks) have too much sway over policy. This was partially responsible for the financial crisis of 2008.

Question 8

what is the issue with monetary policy?

Answer 8

Interest rates can be a very effective way of changing AD. Increases make borrowing more expensive, savings more desirable, both reducing C&l, so therefore reducing AD and helping to control increases in the rate of inflation, normally the main objective. However, it does take time for this to happen; deflationary (or expansionary) monetary policy takes effect slowly. Secondly, it depends on the size of the change- e.g. a 0.25% change in interest rates may have a negligible effect but a 1% change may have a big effect. Also, it depends on international comparisons; e.g. if we increase IR by 0.5% but the USA increase theirs by 1% then hot money will leave the UK, the £ may fall in value, meaning the price of imports increase and inflation goes the wrong way (up not down). QE aims to ensure there is no liquidity trap (e.g. interest rates decrease but lenders are reluctant to lend so borrowing is stuck); however, sometimes the banks hoard the extra cash they’ve gained from E, exacerbating not solving a liquidity trap.
QE was widely used after the 08/09 crash and seemingly prevented that transitioning into a full-blown depression.
Others argue against its effectiveness; for example, it has been shown to dramatically increase the real value of assets, a major cause in income and wealth inequality.