Monetary Policy

Mervyn faces the Music

The Governor and his colleagues faced the press yesterday at the launch of the quarterly inflation report .... here is a selection of comments from them from questions fired from economics journalists, there is some great evaluation in here for AS and A2 economics students!

Revision: Bonds

This two page revision note is aimed at A2 economists and provides a bried overview of the bond market and a look at what has been happening to bond yields in the UK over the last twenty years or so.

Declan and Stephanie in Discussion

This is a really good BBC video clip - an informal discussion between Declan Curry and Stephanie Flanders on some of the policy dilemmas facing the Bank of England and the different strategies open to the monetary authorites for coping with the credit crunch. There is a lot in here hidden just beneath the surface of the discussion.

Interest rates, exchange rates and annual holidays

As expected, the Monetary Policy Committee of the Bank of England has cut the base rate by 0.25% today.

Policy conflict for the UK economy?

The IMF is forecasting a slowdown in global growth to 3.7% in 2008 and 2009. This is in contrast to recent growth rates of over 5%.

Revision: The Economics of Interest Rates

This revision note is aimed at both AS and A2 economists. In particular it offers some pointers as to the deeper level of understanding and awareness of monetary policy required at A2 level. I have also attached a powerpoint chart file looking at trends in several different interest rates in the UK economy - including base rates, mortgages rates, the rates on unsecured credit and bond yields.

Revision note (pdf file)
Revision_Interest_Rates.pdf

PowerPoint charts
Interest_Rates.ppt

Stephen King savages rigid inflation targets

Stephen King, Chief Global Economist at HSBC is brilliant in today’s Independent - attacking the rigid adherence to an inflation target based solely on the rate of change of consumer prices and ignoring asset price deflation. One of the best comment pieces on macroeconomic policy that I have read in a long time.

“The rigid adherence to an inflation target in a world of constant external shocks may sometimes be more a source of instability than of tranquillity. With sizeable relative price shocks stemming from globalisation, the risks of instability are all the greater. Even worse, if the public thinks that price stability is the only litmus test of economic health, the achievement of low inflation may encourage excessive risk-taking which, in turn, could undermine the achievement of broader economic objectives.”

A revolution at the Fed?

The current edition of Business Week has a special on Ben Bernanke’s leadership of the US Fed Reserve. As he drives real official policy interest rates into negative territory, this set of articles is good background reading for students in the UK who want to understand a little more some of the differences in approach between the Fed Reserve and our own Bank of England. How big a risk is the Fed taking that its enormous efforts to inject liquidity into the US financial markets and bolster confidence with aggressive rate cuts, will create further problems down the line?

Fed opts to leave a little powder left

It is a sign of the times when a decision to cut (slash) official short term interest rates by 0,75% (taking US rates to 2.25%) comes in below market expectations! The US Fed Reserve has cut the cost of borrowing in a fresh bid to limit the downside risks for the real economy as financial turbulence threatens to dent a huge hole in prospects for the US economy in the coming months. Loads of comment available on this one from virtually every commentator. Evan Davis, the former Economics editor of the BBC was on good form on TV this morning - explaining that cuts in interest rates from the central banks is not really where the problem lies for most consumers. It is the interest rate charged on the lending and borrowing that the banks do between each other which then feeds through into the market for mortgage and other retail loans.

One of the keys to coming out of this crisis will be for banks to recapitalise and improve their own block of funding before they start lending out again. In short, the banks need to attract fresh injections of capital - perhaps from encouraging more of us to save and also from external sources such as the petro-dollars being held by the sovereign wealth funds. Confidence in the different pieces of the financial system is ebbing away - stabilising the markets is the immediate issue and the problem.

Data charts on US and UK interest rates

US_Rate_Cut_March_2008.pdf
UK_Interest_Rates.pdf

Suggested links on the US rate cut

US and UK inflation

Latest data on inflation suggests price rises are dampening in the US - opening the door for further rate cuts.

But in the UK there are fears that sustained inflationary pressures will prevent the Monetary Policy Committee of the Bank of England reducing the base rate until at least the summer. Geoff looked at this in detail earlier in the week.