Central banks

1. Introduction

Central banks in different countries formulate and implement different monetary policies to achieve specific macroeconomic goals (Mohanty, 2014). Since it is difficult for the central bank to control policy objectives, it will guide the macroeconomy to set goals by regulating relevant indicators. As a central bank, the Bank of England plays a significant role in protecting the British economy and financial system (David & John, 2018). It is at the core of the UK’s financial regulatory system. Especially in emergencies, the central bank’s role in maintaining the stability of the financial system is particularly prominent (John and Michael, 2016). For example, after the global financial crisis in 2008, central banks of various countries have implemented multiple measures to safeguard economic problems, and the United Kingdom is no exception. The Bank of England plays a crucial role in regulating the economy. This report will analyze the Bank of England’s monetary policy after the financial crisis and the referendum and its effects as the bank aim at attaining its objectives and targets as from the point when it became an independent institution in 1997..

2. British monetary policy measures

2.1 Lower interest rates

According to Julia (2009), the Bank of England decided in 2009 to lower the benchmark interest rate to 0.5%, which makes a difference of 50bps from the 2008 benchmark interest rate. This is because the financial crisis has severely damaged the British economy, and economic activities across the country cannot proceed normally. The deposit and loan interest rates of commercial banks are linked to the central bank’s benchmark interest rate. The reduction of deposit and loan interest rates can promote people’s consumption and investment, thereby driving the development of enterprises (Zhao et al., 2019). This will help stabilize the country’s GDP and reduce unemployment.

The benchmark interest rate of 0.5% was maintained through 2016. Until June 2016, the Bank of England lowered the benchmark interest rate again to 0.25% (Katie & Larry, 2016). Implement a loose monetary policy. This is the first interest rate cut by the Bank of England in seven years. This is in response to the economic recession following the referendum on Brexit. After the referendum decision to leave the European Union, the UK’s financial growth pressure was very high, and the exchange rate fell. In addition to cutting interest rates, the central bank also allocated funds to commercial banks to promote commercial bank lending to stimulate economic development.

2.2 Quantitative Easing

Britain started to implement quantitative easing after the financial crisis. Its purpose is to promote economic growth and curb inflation. The goal of the policy is to limit UK inflation to 2%. It launched its first round of quantitative easing on March 5, 2009 (Congressional Oversight Panel, 2010). On August 4, 2016, the central bank added another 60 billion pounds to purchase government bonds. At this time, the asset purchase size reached 4350 pounds (Richard, 2019). At the same time, the Bank of England has launched a £ 100 billion term financing plan (TFS) to buy corporate bonds and encourage banks to issue loans (Bank of England, 2020). The quantitative easing in the UK is mainly reflected in the use of term financing plans, sharing low-interest rates with lenders and lenders.

3. Effects of British Monetary Policy

3.1 GDP of the United Kingdom

It can be seen from Figure 1 that before the financial crisis (2000-2008), its GDP had been increasing, and the economic environment was right. However, under the impact of the financial crisis, GDP in 2008 and 2009 fell sharply. The lower interest rate stimulated consumer spending and corporate investment, which led to a rise in GDP in 2010. Moreover, the quantitative easing policy introduced in 2009 is also conducive to economic recovery. From 2010 to 2014, the UK’s GDP has always maintained an upward trend. But starting in 2015, the UK’s GDP began to fall again. This may be because the UK submitted a “Brexit referendum” in 2015, which had an adverse impact on the British economy. It cut interest rates again in 2016, but its role in boosting GDP was not significant, as GDP fell in 2015-2017. It was not until 2018 that UK GDP started to rise again.

Figure 1 GDP of the United Kingdom (dollars)

Source: World Bank

3.2 GDP growth rate

From the UK’s GDP growth rate, after the sharp drop and fluctuation, the UK’s economic growth rate has gradually stabilized since 2010. After 2010, the GDP growth rate fluctuates around 2%, which is in line with the British government’s goal. This also shows that Britain’s economic growth rate has reached its target. The policy of lowering interest rates has stabilized the economy.

Figure 2 GDP growth of the United Kingdom

Source: World Bank

3.3 Inflation rate

Judging from the UK’s inflation rate, the UK’s inflation rate reached a peak of 3.86% in 2011 and fell to 0.37% by 2015. It can be seen from Figure 3 that the inflation rate in the UK is unstable. However, in recent years, the inflation rate in the UK has been stable at 2% or less, so the author believes that the UK’s monetary easing policy has played a role. And the policy served its purpose.

Figure 3 Inflation Rate (%)

Source: World Bank

3.4 Unemployment rate

From the perspective of the unemployment rate, Since 2011, the British unemployment rate has gradually fallen to the level before the financial crisis. This shows that the Bank of England’s series of monetary policies have played a role in controlling unemployment. First, it lowered the benchmark interest rate, stimulated consumption and investment in the entire society, brought more opportunities for enterprises, and provided more jobs for the labor force. In addition, the monetary easing policy implemented by the Bank of England in recent years is also meaningful. It shared low-interest-rate loans to enterprises, allowing them to invest and produce, and contributed to expanding the size of enterprises, thereby reducing the unemployment rate.

Figure 4 Unemployment Rate (%)

Source: World Bank

4. Conclusion

In conclusion, the Bank of England plays a key role in maintaining the stability of the British economic and financial environment. It can adjust various indicators to promote the development of the global economy. This function of maintaining economic stability became more apparent after the 2008 financial crisis. It lowered the benchmark interest rate and used quantitative easing to stimulate consumption and thereby increase the purchasing power of society. And market demand can promote the stable development of enterprises, and it is also conducive to GDP growth and the stability of inflation and unemployment.

Reference

Bank of England, (2020). Term Funding Scheme with additional incentives for SMEs (TFSME) – Market Notice. Bank of England. Retrieved March 18, 2020, from https://www.bankofengland.co.uk/markets/market-notices/2020/term-funding-scheme-market-notice-mar-2020

Congressional Oversight Panel, (2010). Global Context and International Effects of the TARP. August Oversight Report.

David, F. H., John, N.J.M. (2018). Future of macroeconomics: macro theory and models at the Bank of England, Oxford Academic, 34(1-2), pp.287-328.

John, B. and Michael, K., (2016). The Macroeconomics of Central Bank Issued Digital Currencies. Bank of England Working Paper.

Julia, K. (2009). Bank of England cuts interest rates to 0.5% and starts quantitative easing. The Guardian. Retrieved March 18, 2020, from https://www.theguardian.com/business/2009/mar/05/interest-rates-quantitative-easing

Katie, A. & Larry, E. (2016). Bank of England cuts interest rates to 0.25% and expands QE. The Guardian. Retrieved March 18, 2020, from https://www.theguardian.com/business/2016/aug/04/bank-of-england-cuts-uk-interest-rates

Mohanty, M. S., (2014). The role of central banks in macroeconomic and financial stability. Monetary and Economic Department.

Richard, P. (2019). The verdict on 10 years of quantitative easing. The Guardian. Retrieved March 18, 2020, from https://www.theguardian.com/business/2019/mar/08/the-verdict-on-10-years-of-quantitative-easing

World Bank Open Data, URL https://data.worldbank.org/

Zhao, X.X., Wang, Z.J., and Deng, M. (2019). Interest Rate Marketization, Financing Constraints and R&D Investments: Evidence from China. MDPI.