UK Economy: The Bank of England, UK Monetary and Fiscal Policy
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Table of Contents
Bank of England (BoE)
The Bank of England or BoE is one of the oldest central banks in the world. It was established in 1694 under the Bank of England, and became known as the ‘Old Lady’, or the Old Lady of Threadneedle Street, where it is located in London. It was nationalised after the end of World War II, and plays a key role in monetary policy, managing the national reserves and helping to maintain the stability of the British banking and financial systems..
It designed to help maintain price stability, support the policies of Her Majesty’s government, issue banks notes, control the money supply and circulation, act as banker for the government, act as lender of last resort for banks, and manage banking regulation and oversight.
UK Monetary Policy is set by the Bank of England. One of Gordon Brown’s first acts as Chancellor of the Exchequer in 1997 was to give the BoE independence in setting rates, which previously had to be approved by the Chancellor.
UK Monetary Policy, 2009 – 2010
As of Q1 2009, the Bank of England has already cut Interest Rates to a historic low of 1.0 per cent, with the consensus believing this will drop to 0.5 per cent.
Further measures are probably needed, and this will include quantative easing, in other words printing more money. Up to 150 billion GBP in new money is expected to be pumped into the economy in 2009.
The Bank of England’s balance sheet will probably continue to grow as it shores up more banks and financial institutions with both capital injections and loans, and as it acquires government Treasury bills to help finance the stimulus package will attempting to limit the crowding out of private borrowers.
UK Fiscal Policy, 2009 – 2010
During Gordon Brown’s stint as Chancellor, the Labour Party officially adopted the ‘Golden Rule’ of fiscal policy.
The Golden Rule states that over the full economic cycle, the government should borrow to invest only for future needs. Current needs should be met by tax revenues. This should allow for stable finances as defined by the ratios of public sector net worth, debt and current expenditure to national income.
In conjunction with the Golden Rule, the UK government also seeks to follow the Sustainable Investment Rule, which should keep national debt at a prudent level currently set at 40 per cent of GDP.
By the end of 2008 estimated public debt had already risen to 42 per cent, and could rise to 70 per cent of GDP by 2010, meaning that the Sustainable Investment Rule has been broken. The justification is that a severe recession needs Keynesian stimulus to revive it, and that balancing the books should only be sought once the economic recovery begins.
