Monetary Policy Framework in the UK Essay Example | Topics and Well Written Essays - 2250 words

Monetary Policy Framework in the UK - Essay Example This essay stresses that there are a number of guiding principles like price stability, exchange stability, full employment and maximum output and a high growth rate etc, in framing the Monetary Policy for an economy. This paper declares that the monetary policy of any country refers to the regulatory policy, whereby the monetary authority maintains its control over the supply of money for the realization of general economic objectives. This involves manipulating the supply of money, the level and structure of interest rates and other conditions affecting the availability of credit. However, in the context of developing economies monetary policy acquires a wider role and it has to be designed to meet the particular requirements of the economy. This involves not merely the restriction of credit expansion to curb inflation, but also the provision of adequate funds to meet the legitimate requirements of industry and trade and curbing the use of credit for unproductive and speculative purposes. The monetary policy of an economy operates through three important instruments, viz. the regulation of money supply, control over aggregate credit and the interest rate policy. Economic growth is dependent on m obilizing savings and directing them into productive channels. In this process, money supply can only play a limited role. However, the role establishes an important connection between money supply, output and price level (ICFAI Center for Management Research (ICMR)). These relationships cannot be ignored even if the primary concern of the government is mobilization of real factors that ultimately lead to economic growth. UK Monetary Policy regime A principal objective of any central bank is to safeguard the value of the currency in terms of what it will purchase. Rising prices - inflation - reduces the value of money. Monetary policy is directed to achieving this objective and providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy operates in the UK mainly through influencing the price of money - the interest rate. In May 1997 the Government gave the Bank independence to set monetary policy by deciding the level of interest rates to meet the Government's inflation target - currently 2% (Bank of England). The 1998 Bank of England Act made the Bank independent to set interest rates. The Bank is accountable to parliament and the wider public. The legislation provides that if, in extreme circumstances, the national interest demands it, and the Government has the power to give instructions to the Bank on interest rates for a limited period (Bank of England). In the period from the floating of the exchange rate in June 1972 to the granting of operational independence to the Bank of England in May 1997, UK monetary policy went through several regimes. These included the period in the 1970s when monetary policy was considered subordinate to incomes policy as the government's primary weapon against inflation; an emphasis on monetary targeting in the late 1970s and early 1980s; moves from 1987 toward greater management of the exchange rate, culminating in the UK's membership of the Exchange Rate Mechanism (ERM) from