Monetary Policy: Instruments Flashcards
Who uses the tools and why?
Bank of England
To control the supply of money in the economy
What’s the main instrument of monetary policy?
Short term interest rate
To achieve and maintain, long term economic goals
Designed to keep the banking system short of money, and then lending the banks the money they need at an interest rate which the Bank of England decides
U.K. - Bank of England influences this exercise through daily operations in the gilt and money markets
How will interest rate changes affect the economy?
Change in cost of borrowing will affect SPENDING DECISIONS
attraction of spending - rise in rates, saving more attractive, borrowing less attractive
Affects income, outgoing/spending power
Value of certain assets, e.g. Property, stocks and shares
Exchange rate
What is quantitative easing?
Creating / printing money to buy bonds, generating growth in the market
Emergency measure used to boost economic growth –> buying assets, such as gilts and corporate bonds, with money that is effectively created out of accounting entries at the bank
As improvements are seen…
Consumer confidence increased
Increased spending
Increased investments
With quantitative easing, the Bank of England steps in by…
Buying long dated assets (gilts, bonds) with cash to boost liquidity and to enable lending.
Leading businesses and people to borrow more
Which reduces interest rates
So they spend more and create jobs
To boost the economy
What’s the twist of quantitative easing?
Bank of e buys long dated bonds and therefore created a demand, pushing up the price of the bonds in the secondary market
Bank of e can target the bond maturity dates which will impact the long term interest rates
Result: yields of bonds are forced lower
Downward trend for yields is beneficial for corporate customers wanting to borrow long term - long term interest rates fell
