Download Low Interest Rates and the UK Economy

Low Interest Rates and the UK Economy
AS Macro – Spring 2014
Limits to the Effects of A Cut in Nominal Interest Rates
Commercial banks
reluctant / unable to lend
Some interest rates
have actually risen
High stock of
personal debt
Low Business &
Consumer Confidence
Falling real
incomes for
savers
Some of the Recent Changes to UK Monetary Policy
There have been a number of important changes in the handling of
monetary policy by the Bank of England in recent years
• Quantitative Easing (QE) 2009 – buying bonds to increase
deposits and lending by the banking industry
• Project Merlin (2011) - agreement between banks & Government
to increase lending to small/medium-sized businesses
• Funding for Lending Scheme (2012) – joint policy between
Treasury and the BoE which provides cheaper funding to banks
that increase their loans to households and businesses
• Forward Guidance (2013-14) - under forward guidance, the
Bank’s policy rate will remain at 0.5% at least until unemployment
falls to 7% or until there are clear signs that the amount of spare
capacity in the economy has reached normal levels
Evaluation Points on Interest Rates & Monetary Policy
• Time lags should be considered when
analyzing effects of interest rate changes
• Monetary policy not an exact science –
consumers and businesses don’t always
behave in a textbook way!
• Many factors affect costs and prices which
can change inflation risks in a country
• Monetary policy does not work in isolation!
Consider how fiscal policy is affecting the
economy
• Objectives of monetary policy can change –
the USA Federal Reserve’s mandate is
“maximum employment, stable prices, and
moderate long-term interest rates”