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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. 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.

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Low Interest Rates and the UK Economy

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  1. Low Interest Rates and the UK Economy AS Macro – Spring 2014

  2. Limits to the Effects of A Cut in Nominal Interest Rates

  3. 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

  4. 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”

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