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The Bank of England recently announced its monetary policy, keeping the interest rates unchanged again at 0.5% and thereby continuing the trend of record low interest in the country for the last five years.
Interest rates in the UK remained static from 2009 when the bank rate was slashed to 0.5 %, marking the beginning of almost five years of loose monetary policy against the backdrop of weak employment rate and high inflation in the country.
According to The Bank of England’s forward looking statement economic recovery is dull and on the contrary inflation is still above the target. The Monetary Policy Committee intends to follow a stimulative approach until the economic slack has been removed but remain perfectly focused and greatly concerned about any material risks to price stability or financial stability due to this course of action.
If the rates of interest are increased to contain inflation then the cost of borrowing tend to increase as well, hammering down directly on the employment rate because any increase in cost of borrowing lowers growth rate. On the flip side,if interest rates remain low for a longer period of time, money supply tend to increase dramatically fostering the possibility of hyper-inflation in the country.
The employment rate and price stability can’t be balanced through the lever of monetary policy alone due their conflicting impact over the economy but as of now rate of employment remains a key parameter for the English central bank that looks considerably close to the target of 7% unemployment.
According to the Belfast Telegraph “the £375 billion programme of quantitative easing pumping money into the economy was also held at the same level today, with the UK’s gross domestic product still below the level it was six years ago despite improving growth during 2013”.
The interest rate in Britain is going to stay low until the unemployment rate falls to the threshold of 7% and along with that the Monetary Policy Committee is willing to carry forward the asset purchase program to help the economy to gain momentum. The unemployment rate in the country over the last two years has followed a pattern of gradual slowdown, however remaining atop of the target of 7% so far.
Monetary policy as tool helps is achieving short-term goals like stable external value of currency measured in terms of exchange rate and price stability measured by inflation among other and remains a central aspect of monetarism.
But on the contrary, relying on variations in the money supply according to the economic condition, in order to strengthen the economy, almost turned fruitless in most of the countries like India and US and the apparatus of loose money supply, especially in the UK, has failed to yield the anticipated results in the last five years. The unemployment rate is still hovering above target and that still remains a key focus.
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