INTRODUCTION First before we tackled on the monetary policy let us view first the background on the Bank of England and know its content. Bank of England, popularly known as the Old Lady of Thread needle Street, its main office stands on the street of that name in London. Bank of England central bank and note- issuing institution of Great Britain. In British Isles, the bank has eight branches all of which are located. Throughout Great Britain and Northern Ireland, although Bank of England notes are legal tender, banks in Scotland and Northern Ireland also issue notes that may be either used as currency themselves or exchanged for Bank of England issues. The Bank of England has sole central banking functions in Great Britain, in all matters beside note issue. The affairs of the bank are controlled by a governor, a deputy, and 16 directors. In 1694, it was founded as a commercial bank by William Paterson with a capital of £1.2 million, by which was advanced to the government in return for banking privileges, thus it includes the right to issue notes up to the amount of its capital. Monetary Policy
Monetary stability is one of the Bank of England’s two core purposes. Monetary stability means stable prices-low inflation-and confidence in the currency. Define by the Government’s inflation target, as stable prices which the Bank seeks to meet through the decisions on interest rates taken by the Monetary Policy Committee. To safeguard the value of the currency in terms of what it will purchase is the principle objective of any central bank. Rising prices-inflation-reduces the value of money. For non-inflationary economic growth, monetary policy is directed to achieving this objective and providing a framework. Mainly through influencing the price of money-the interest, as in most other developed countries, monetary policy operates in the United Kingdom (UK). To meet the Government’s inflation target-currently two (2) percent, in May 1997 the Government gave the bank independence to set monetary policy by deciding the level of interest rates. In itself, low inflation is not an end; it is however an important factor in leading helps to encourage long-term stability in the economy. For achieving a wider economic goal of sustainable growth and development, price stability is a precondition. To the functioning of the economy, high-inflation can be damaging. To foster sustainable long-term economic growth, low inflation can help. Based on the Consumer prices Index (CPI), the inflation target of two percent is expressed in terms of an annual rate of inflation. The remit is not to achieve the lowest possible inflation rate. By more than one percent, if the target is missed on either side, the governor of the bank must write an open letter to the Chancellor explaining the reasons why inflation has increased or fallen to such an extent and what the bank proposes to do to ensure inflation comes back to the target. It doesn’t mean that a target of two percent that inflation will be held at this rate constantly. Well, that would be neither possible nor desirable. And by large amounts, interest rates would be changing all the time, causing unnecessary uncertainty and volatility in the economy. To keep inflation at two percent, even then it would not be possible in each and every month. The functions of the bank are that the main business of it is to take deposits and to lend. Between the rates they charge for loans they make profits from the interest margin and the rate they pay to the depositors. In addition to that to that it thus operates the payments system and, for this purpose, about half of the deposits in the bank are sight deposits that may be withdrawn without notice when the account holder makes a payment. Banks therefore need liquid assets, to cope with net withdrawals of deposits. At the central bank, excess reserves are the banks’ own deposits and they are liquid because they may be immediately withdrawn. To hold as a minimum percentage of their own short-term deposit liabilities, they are the excess over required reserves which many central banks oblige their commercial banks. However, to minimize their holdings of currency which sometimes called vault cash or till money, the banks have an incentive, thus excess reserves because these assets do not earn interest. Banks hold various short-term paper such as bank bills, treasury bills and CD’s and longer-term paper such as government bonds, other than that banks naturally prefer interest-earning liquid assets. It is these liquid assets that enable banks to pay their depositors, since they may be easily sold in the money-market or used as collateral security for loans from other institutions. At the extreme, monetary policy is a potent force. To pay for government operations, in countries such as the Russian Republic, Poland or Brazil where the printing presses run full tilt, money supply is expanding rapidly and the currency becomes rapidly worthless compared to goods and services it can buy. A very high level of inflation or hyperinflation is the result. At the other extreme, restrictive monetary policy has shown its effectiveness with considerable force. In any event, insights into monetary policy are very important to the investor. The availability of money and credit are key considerations in the pricing of an investment.
Central Bank Money: Demand and Supply
Because they are the sole issuers of central bank money, central banks can implement monetary policy. A banknote is the most familiar form of central bank money. To issue banknotes in England and Wales, only the Bank of England is allowed. But Bank of England notes are simply supplied on demand. Held by in particular commercial banks at the central bank, the second form of central bank money consists of balances (current accounts or deposits). To the implementation of monetary policy and to the liquidity of the banking system, these balances are crucial both. The terms on which banks and building societies can manage their accounts at the Bank, the central elements in the Bank’s reform of monetary policy implementation concerns. In the form of deposits, commercial banks and in the United Kingdom, building societies are themselves issuers of money. The sole issuer of sterling central bank money is the bank. Banknotes and balances on the reserves accounts of banks and building societies. By setting an interest rate, the quantity of central bank money and equivalently the size and composition of the Bank’s sterling liabilities, is largely demand-determined, which had given that the bank implements monetary policy. It is important that the Bank provides sterling financing in a transparent and non-discretionary way, because the Bank’s Monetary Policy Committee decides the official Bank Rate.
Detailed description of the framework
Eligibility to participate in the Bank’s facilities we have criteria for each: reserves scheme membership; access to the standing facilities; and being counterparty in open market operations. The reserves scheme which they hold reserves on their Real-Time-Gross-Settlement Accounts and Sterling Ordinary Accounts respectively. Standing facilities which they enable participants in the reserves scheme to meet their reserves targets, the Bank requires reserves scheme members to have access to the standing overnight deposit and lending facilities. To have access to the standing facilities, all other banks and building societies that are required to place CRDs at the Bank are also eligible. The Bank believes that all such eligible banks and building societies should sign up to have access to them. Lastly, in open market operations, the bank accepts as counterparties in its open market operations (OMOs): banks and building societies eligible to participate in the reserves scheme; and other banks, building societies and securities dealers authorized under the Financial Services and Markets Act 2000 that are active intermediaries in the sterling markets, subject to standards of prudence and risk.
Transactions with the central bank
In this analysis, the transactions that are of most interest are those that cause banks to be more or less indebted to the central bank. By drawing a cheque against his bank deposit, consider a payment of tax, and suppose the individual paying the tax does so. To the government the cheque is passed and it is paid into the government’s account at the central bank. This means the paying bank now owes the amount of the cheque to the central bank. When the government spends, the opposite changes take place. At the central bank, suppose the government draws a cheque against its deposit. Thus it presents the cheque to some individual or firm. This causes the bank’s debt to the central bank to be reduced, when the cheque is deposited into a commercial bank account. The commercial banks generally find that collectively they are in debt to the central bank, as a result of all these transactions involving the central bank. This may be caused by net flows into the government’s accounts at the central bank, greater currency demand, bills maturing in the hands of the central bank, maturing central bank loans to the banks, or changes in the other entries on the central bank’s balance sheet. Money-market shortage is which the net amount of indebtedness of banks to the central bank on any day. To the central bank would be for them to draw on their excess reserve deposits, the simple way for banks to pay their debts.
Bibliography: See J. H. Clapham, The Bank of England: A History (2 vol., 1944; repr. 1966); J. Giuseppi, The Bank of England (1966).
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