4.5.3 Role of the Central Bank

Question 1

monetary policy committee

Answer 1

• Monetary policy → policy that involves changing interest rates to stimulate/limit spending in the economy
• Bank of England → central bank of the UK
• Monetary policy committee → 4 from BOE, 4 independent economists BOE and a chairman to be a tiebreaker in votes
• Inflation → 0-2% is government aim,
• GB: 1997 made setting base rate sole role of central banks, as it showed it worked well without political influence (eg trying to win an election by changing interest rates)
• MPC created as a result

Question 2

MPC inflation and general aims

Answer 2

• Minutes of MPC always published 2 weeks later → transparent
• 2% target rate is symmetrical → below 1% is concerning
• 1% and lower indicates prices fall further and reduce spending on investment and consumer goods
• Leads to recession
• Inflation above 2% indicates less stability in economy
• Steady and small price increases help make the economy more flexible, creating conditions for maintaining sustainable economic growth rates

Question 3

role of the bank of england

Answer 3

1. Determine monetary policy
2. Provide banking services to the government, managing government debt and managing exchange rate
3. Regulate and control banking system to maintain economic stability
   - Monetary and fiscal policy → sets base rates, determing monetary policy
   - Quantitative easing → sells government bonds to finance government debts, and stimulate spending in the economy
4. Tell banks how much assets they have to hold in cash and how much they can invest

Question 4

why are banks needed

Answer 4

1. They are intermediaries between consumers and markets → without them no communication and market failure occurs
2. Deep recessions: savings and incomes of consumers lost
3. Therefore govs will back banks that will fail → will pay for up to £85,000 of lost savings

Question 5

economic stability

Answer 5

• 1997: Brown gave power of changing base rates to BOE
• reduced political influence and economic stability is prioritised
• Monetary policy committee meet 2x a month to set base rate and minutes published for transparency
• Politically neutral office of national statistics → collect key data for decisions about interest rates

Question 6

low base rate and quantitative easing

Answer 6

• 0.5% - 0.25% during financial crisis due to uncertainty
• If economy doesnt respond to interest rates and they cannot be cut anymore, quantitative easing is used
• B of E buys government bonds from banks
• This is a cash injection into the economy → banks increase lending and can invest more themselves
• Cheaper to borrow → consumer borrowing and spending increases
• Firms increase borrowing to increase investment
• Increase C, I and AD

Question 7

financial policy committee

Answer 7

• Priorities are financial stability and resilience → primary objectives
• Identifies and monitors risks that threaten the resilience of the UK financial system as a whole
• Has power to take action to counter those risks
• Unsustainable levels of debt and credit growth
• Supports economic policy of the government
• Created after 2008 financial crisis → gap in oversight of whole financial system
• Can give binding instructions to PRA and financial conduct authority
• Eg power to set capital requirements → how much they save readily to lend

Question 8

prudential regulation authority

Answer 8

• Supervise financial services and products → 1500 financial institutions, such as banks and insurance companies
• Part of the BOE
• Ensures firms are not being too risky, and supports financial stability
• Make sure banks are not doing things that could threaten stability of financial system

Question 9

financial conduct authority

Answer 9

• Regulates the financial services industry in the UK
• Promotes healthy competition between financial services providers
• Works with treasury
• Protects consumers
• Regulates 450,000 business in UK to ensure financial markets work well —> supports integrity of UK financial industry

Question 10

problems with regulatory bodies

Answer 10

• how effective can they be if funded by the industry they’re meant to regulate —> regulatory capture
• foreign banks may see regulation of the UK unattractive —> will move out of UK to EU etc

Question 11

PPI scandal, lloyds and financial conduct authority

Answer 11

• £117m retail fine to Lloyds bank, bank of Scotland and black horse ltd
• Lloyds assessed company complaints about PPI scandal —> rejected 37% of 2.3 million
• Call centre staff told that Lloyds’ sales were complaint with regulations and advised to deal with complaints like this
• PPI: helps policy holders pay back loans and credit card debt in points of illness, accident, redundancy and death
• bank has decided to review/uphold 1.2 million of complaints
• in total has set aside £12.025 billion to refund to customers for PPI misspelling
• 2019: 38 billion payouts in total