Monetary Policy of the Bank of England Essay Example | Topics and Well Written Essays - 1750 words

Monetary Policy of the Bank of England - Essay Example nflation, consumer price index is used which measures the changes in the prices of a fixed basket of goods and services and compare the new prices with the prices set in base year. The change therefore outlines as to how much inflation has emerged in the economy over the period of time. There are different price indices which can be used to measure the inflation however, consumer price index or CPI is widely used as a measure of inflation in the economy. Other indices include producers’ price index, commodity price index etc and these indices measure different aspects of price change over the give period of time in any economy. Inflation generally can be of two types i.e. cost push and demand pull inflation. Cost push inflation occurs when there is a decrease in the aggregate supply due to the increase in the wage rates as well as increase in the prices of the raw materials. These economic variables therefore can cause the aggregate supply to decrease thus pushing the prices o f the goods and services up and therefore increasing the inflation within the economy. Demand pull inflation can occur due to an increase in the aggregate demand and therefore can cause the price level to rise. This could occur mostly due to the increase in the aggregate money supply or the expansionary fiscal policies adapted by the government. Why Inflation Arises? Inflation also tends to occur when the overall aggregate demand for goods and services increases more rapidly than the increase in the aggregate supply of the goods and services. There can be different factors which can actually cause this imbalance between the aggregate supply and demand in the economy. The key reasons as to why this imbalance may occur can due to the increase in the consumption level, an increase in the investment... This essay outlines the detrimental effects of the high inflation for the growth of UK economy, and aims to determine optimal monetary policies for the Bank of England. Inflation is considered as a rise in the general price level in an economy over a given period of time. It therefore measures the rate of change of prices over a given period of time and indicates a percentage rate by which prices of goods and services have generally increased during the given period of time UK’s inflation rate has been recently soaring at high rate and there is a strong probability that the same can further increase in the future. At this time when economy is at a very fragile point, such higher level of inflation can actually discourage the consumers from spending and thus further putting pressures on the economy due to lack of demand. Over the period of time, Bank of England has taken measures to keep interest rates at really low levels in order to ensure that easy credit is available to consumers at relatively low rates. The idea was also to induce consumption in order to regenerate the demand and increase the economic activity. However, the continuation of this policy seems to have backfired because of the rapid increase in the inflation in the economy. The increase in the inflation rate has been mostly attributed to the expansionary monetary policy adapted by the Bank through quantitative easing as well as the reduction in the interest rates.The BoE must develop the reputation and credibility for its steps to reduce the inflation.