Setting interest rates (Unfinished)

Question 1

Who sets interest rates? and how?

Answer 1

• Interest rates are set by the Monetary policy committee (MPC)
• They meet 10 times a year
• There’s 9 members including the goverener Mark Carney
• Decisions are made by majority vote

Question 2

What is the objectives of controlling the interest rate?

Answer 2

To keep inflation within the target range over the next eighteen months to two years.

This is because interest rates have a signinfcant time lag, they operate in the medium term.

Question 3

What are the 7 main criteria the Bank of England look at twhen setting interest rates?

Answer 3

1. The growth of the economy (i.e Increases in real GDP) - If too fast they might increase interest rates (causes AD to fall so it’s not on the verticle part of LRAS)
2. Rate of inflation
3. Level of unemployment- If unemployment is too high interest rates will likely be reduced.
4. Level of wages - high wages means interest rates increase
5. Level of commodity prices, if too high interest rates increase to help prevent cost push inflation
6. Business and consumer confidence - If confidence is low people will spend less and so the Bank of England may decrease interest rates.
7. Level of the exchange rate, more likely to push up interest rates if the exchange rate has been falling as it will increase costs for importers and decreases demand for our exports.

Question 4

What are the problems with the methods of deciding whether to change interest rates?

Answer 4

• A lot of the information is based on forecasts that may not be accurate
• Not all of these measures will say the same thing about the economy and what might be happening to inflation (E.g - The economy might be growing fast but commodity prices might be falling).