Uk Monetary Policy

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MPC notes
Monetary policy in the UK is controlled by the bank of England. In 1997 the Monetary Policy Committee was set up, with the sole task of setting interest rates in order to meet the government’s target rate of CPI inflation of 2% +/- 1%. The MPC is made up of 9 members, including the governor of the Bank of England, two deputy governors and a number of expert economists who bring knowledge and information from different areas and markets in the UK. The MPC meet monthly to set the base interest rate, which will then filter down to the interest rates offered by high street banks, as they borrow their money from the Bank of England. In their meetings information is presented to the committee, which includes information about business conditions, market data, exchange rates etc.
As the MPC is a totally independent committee of people it ensures interest rates can be set most efficiently and fairly, without any political interference, therefore ensuring the interest rates will always be considered fairly and quickly each month helping the smooth running of the UK economy.
The base rate of interest effects the interest rates of all commercial banks. This then effects financial assets (bonds, houses & shares). Firms investment will change, as will the exchange rate, which will affect overall spending in the economy and (X-M).
Factors affecting the decision to change Interest Rates
The Monetary policy committee, a group of 9 people bring all factors to the table when considering what they should set the rate of interest at. 5 bank of England officials and 4 outsider economists bring information on the state of the economy in order to discuss how interest rates should be set. They consider evidence about whether inflationary pressure is increasing, decreasing or staying the same.
If they believe inflationary pressure is increasing then they will raise interest rates to reduce AD, which will lower the price level in the economy. If inflationary

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