This requires management of both monetary and fiscal policies, which can be examined in terms of the way that they have the aims of creating a stable economic environment which will facilitate growth and the way that the policies manage, and are seen to manage all economic aspects. It is not only the practical management that is important in terms of the direct impact, it is also the way that the policies and actions are perceived, perceptions can also drive markets, such as currency markets, which will have an impact on the economy as well as reflect its’ state.
In the UK since 1992 government policy has been to have underlying inflation remain within the 1% to 4% region. This target has been changed over time, with the target for the present parliament being the lower end of this range (Lexis, 2007).
The general aim of monetary policy is to create an environment of low inflation. Monetary policy has a direct influence on inflation although there will usually be a lag between cause and effect. Interest rates have been a tool used in much a policy for some time, the assessment of interest rates are usually determined by considering the potential inflation rate of the future, usually between one and two years. The assessment itself will take a ride range of information this will include a range of indicators which are indicative of potential inflationary pressures such as the broad and narrow monetary aggregates, exchange-rate movements and asset prices. General inflationary pressures such as wage and price setting is also important, high wage settlements could indicate an increase of disposable income which in turn can create a demand in excess of supply for goods within the economy. If demand is created ahead of the country's capacity to supply goods the result of supply and demand will be price increases, inflation (Nellis and Parker, 2000). Prices considered when looking at monetary policy will also include retail price patterns but may also include the costs of goods such as material input prices and commodity prices.
In the past there has been a great deal of controversy regarding the way that monetary policy is set within any country. In addition to the correct moves, the policies need to be seen as stable and competent to ensure there is confidence in the market by traders and consumers. A lack of confidence alone can result in poor economic performance. A policy which has been undertaken by many countries, including the UK as well as in Europe, has been the creation of an independent central bank, which theoretically, is free from political intervention. This means that policies should be determined based on economic need, not political expediency. Looking at the UK it was only in 1997 that the Bank of England was granted the freedom to make its own decision regarding monetary policy and interest rates (Lexis, 2007). This was later backed up by legislation the form of the Bank of England Act 1998. The move was partly forced upon the government due to the unification Europe and the requirement for independent national banks, however the government still have a veto on the Bank of England’s decisions to be used in exception circumstances and as such we can argue that the independence is limited by this factor alone and the way that any government may decide to use this veto if it disagrees with the decision that is made by the bank and government policy is still very important in the way the decisions are made. There are also regular “policy”...