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Monetary Policy Flashcards

1
Q

Wide aim on monetarily policy

A

Financial stability and inflation kept at 2%

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2
Q

Narrow aim of monetary policy

A

Keep inflation at 2%

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3
Q

Two core purposes of B of E

A

Monetary stability and financial stability

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4
Q

Costs of inflation

A

Menu costs
Shoe leather costs
Uncertainty and confusion
Redistribution of income from poor to rich
Redistribution of income from lenders to borrowers
Increase interest rates
Fiscal drag - tax brackets don’t keep up with cpi

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5
Q

Monetary stability aim

A

Keep stable prices (2% inflation) and confidence in currency

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6
Q

Financial stability aim

A

Supervise financial markets

Reduce financial risk in system

Act as a lender

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7
Q

What does b of e look after

A

Financial system as a whole

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8
Q

What does FSA look after

A

Individual banks and financial organisations

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9
Q

why was FSA disbanded and what did it get split into

A

failed to adapt to GFC

split into PRA , FPC = organisations of B of E
and also independent organisation known as FCA

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10
Q

What did
financial position executive board do

A

Give guidance on financial stability

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11
Q

Northern rock collapse

A

Bank struggling - so b of e lent money to bank in form of emergency loan but made this information public which was the law - but this caused people get frightened and take money out which lead to bank becoming bankrupt

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12
Q

What is FPC

A

B of e main institution for financial stability q

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13
Q

Aim of FPC

A

Decrease financial system risk and increase resilience of uk financial system

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14
Q

Who’s in FPC

A

Internal and external members who provide expertise in niche areas or the market

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15
Q

Why do FPC and MPC have some cross membership

A

To increase consistency between financial regs and momentary policy

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16
Q

FPC instruments

A

Countecyclical buffer rate
Sectoral capital requirements
Leveraage ratio requirement
Loan to value, debt to income and interest to cover limits

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17
Q

What is countercyclical buffer rate

A

International 8 %
Uk 1% but moving to 2%

Capital required by each bank in case of negative economy shock

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18
Q

Sectoral capital requirements

A

When lending to riskier sectors , banks are required to hold additional capital against i t

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19
Q

Leverage ratio requirements

A

Limits exposure relative to their capital base

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20
Q

Loan to value , debt to income and interest to cover limits

A

Limits on mortgages in order to contain risks from housing markets

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21
Q

Stress testing

A

B of e annual stress test

Able to assess banks resilience and make sure they have enough capital to withstand shocks

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22
Q

Ring fencing

A

Segregates retail banking from investment activities

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23
Q

PRA 3 aims

A

Promote safety of firms
Facilitate effective competition
Secure protection for policy holders

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24
Q

What is PRA apart of

A

B of e

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25
PRC members
Internal and external members q where external members are majority
26
FCA part of b of e
No
27
What two questions do fca ask
Are customers getting a fair price Are financial institutions abusing market power
28
Principles of monetary policy
Price s stability at 2% Openness accountability credibility Flexibility
29
What is bad for economy in regards to inflation
If inflation too high or too low
30
What happens when inflation not between 1 and 3 percent
Governor must explain to chancelllor why its not in target range and what they plan to do in order to get inflation back at 2 percent
31
What is cost of bring down inflation in short run
Increase bank rate = increase cost of borrowing so less borrowing and less investment = recession
32
What does MPC make decisions on
Interest rates and quantitative easing
33
Why is corridnation between fpc and MPC difficult
Increase bank rates causes a decline in financial stability
34
Who in MPC
Internal and external members plus non voting member from treasury to inform on latest fiscal updates
35
Bank rate ta the moment and why
4.5% in order to get inflation down to 4 % by the end of 2023
36
What is momentary policy report
Reports on financial state of uk and provides forecasts for growth and inflation in the uk Increases openness of Bank of England
37
When was b of e made operationally independent
1997
38
Pros to operational independence
MPC has more expertise than gov B of e more protected against pressure from gov Stops potentially buying votes by gov
39
Limitation B of e operational independence
In extreme events gov can instruct b of e on policy Price stability defined by gov at 2 percent MPC required to support gov policy
40
What are the 3 conventional instruments b of e uses to implement MPC decisions
Operational standing lending / deposit facility Short term repo Long term repo
41
What are the 4 unconventional instruments b of e uses to implement MPC decisions
Discount window facility Contingent claim repo QE Forward guidance
42
Operational standing lending/deposit facility
Available over night and on demand Normally lending rate 25 points higher than bank rate Deposit rate 25 points lower than bank rate Helps get market rates closer to bank rates and helps banks manage unexpected payments problems
43
Short term repo
Banks can lend highly liquid assets out for 1 week periods against level A collateral Helps keep short term interest rates at bank rates by ensuring banks don’t need to pay above bank rate for money reserves
44
Positive of short term bank repo
Injects central bank money into the economy for short amount of time
45
Long term repo
Allow banks to borrow central bank money for 6 month periods against broad range of collateral
46
How are long term repo bids submitted
Banks submit big in terms of spread to bank rate Higher the spread - more likely to get bid accepted
47
Discount window facility
On demand facility aimed at banks experiencing liquidity shocks Borrow form b of e highly liquid assets for less liquid collateral - high interest payments to incentives quick repayment
48
When use Contingent term repo facility
B of e can activate when there’s market wide stress
49
What is contingent term repo facility
Allow b of e to increase liquidity of banks for full range of collateral - very flexible
50
What does b of e lend against
Collateral
51
Why collateral
Bc if party fails to repay then they can sell collateral to make good of any loss
52
How does b of e protect itself from falling price of collateral
Lend less than the collateral is worth
53
Levels of collateral
A high quality highly liquid B C less liquid less quality
54
When did QE start
2009
55
Why QE
Increase money supply into economy to bring down interest rates and encourage people to spend
56
How does QE work
B of e creates new money and buys gilts from private corperations Interest rate on money low so they invest new money into other financial assets which increases demand on finaancial assets so supply increases thus so interest rates decrease which increasing borrowing and investment so spending increase
57
What does b of e do with interest retuned from gilts
Gives it to the gov
58
Pros of QE
Increase money supply Increases demand and production Asset purschase targets prevents gov from inflating debt away and QE being abused Ensures monetary policy effective and decrease disruption to financial market s
59
Cons of QE
Initial effect caused increase in gdp but later rounds have had no effect Form of government finance which can severely worsen inflation and loses credibility for b of e Creates unsustainable bubbles in bonds and stock markets Decrease interest rates for private investors of bonds Increases inflation which also loses credibility of b of e
60
Forward guidance started in
2013
61
Why was forward guidance used
To show increase in bank rate snot imminent
62
Why did forward guidance back fire
Because initially it was too specific and forecasting variables in the future is very difficult and thus their predictions were wrong
63
What did this back fire for forward guidance result in
Decrease in forward guidance and made it very vague Thus b of e further lost credibility
64
What explains largest variation in imbalances and financial markets
Monetary shocks
65
What affects probability of boom or bust
Short term interest rates or mortgage market deregulation
66
What are high cost boom related too
Looser monetary policy
67
What is problem with inflation and boom
Interest rates to narrowly focused on inflation can cause booms
68
Why is tailoring monetary policy good for certain areas
Irish interest rate would have been 6.5% higher and this would have reduced House prices by 25-30% before housing bust
69
What has driven recent high inflation
Volatile energy prices and supply chain issues from covid Very expansive monetary and fiscal policies to prevent economy collapsing And increase in central bank money due to QE
70
What has caused household financial struggles
Increased mortgages and cost of living
71
How many owner occupied homes will receive an increase rate
4 million
72
What does fpc judge about banks and why is this contradictory
Banks are resilient and are able to lend if things worsen However banks are tightening lending as risk has increased which is slowing growth
73
Why inflation high after war
Monetary financing for war
74
What was introduced in 80s to decrease inflation
Monetary targeting
75
Succes of monetary targeting
Unknown as other countries with other strategies achieved lower interest rates
76
PROBLEMS WITH CORPERATE LOANS
70 percent of corporate loans are floating interest rate which is increasing the cost of borrowing
77
What is inflation doing to saving
Increased saving ratio

Economic policy (3 decks)

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