The Effectiveness of The Bank of England Policies in Overcoming the Essay

The Effectiveness of The Bank of England Policies in Overcoming the Crisis - Essay Example This essay offers a comprehensive analysis of activities, that the Bank of England realizes to manage the inflation, with a focus on effectiveness of the Quantitative Easing Programme, which is among the mechanisms applied by the bank to stabilize the economy. It is argued in the paper, that the use of the Quantitative Easing of may cause higher inflation in future. The BOE applies both monetary policy and Quantitative Easing mechanism as the inflation management tools, to ensure that the inflation level does not surpass the lower or the higher limits as predetermined. The concept of inflation refers to a situation where there is a general rise in the prices of goods and services in an economy, within a specified period of time. Monetary policy refers to a mechanism applied to reduce the inflation rate, through the BoE introducing a period of higher interest rates, which targets to reduce both the consumer and the investment spending, and thus lower the quantity of money that is circulating in the economy. The Quantitative Easing mechanism is an unconventional method of managing inflation, which is applied under circumstances where the monetary policy does not generate the desired effect, in enhancing the stability of the economy The risks associated with the Quantitative Easing mechanism is its potential to cause future inflation, through capital flights and the stagnancy of production of goods and services, since the mechanism does not affect the interest rates, which in turn determines the production in the economy. ... In doing this, the Bank of England applies various mechanisms, which include: Monetary policy This refers to a mechanism applied to reduce the inflation rate, through the Bank of England introducing a period of higher interest rates, which targets to reduce both the consumer and the investment spending in the economy, and thus lower the quantity of money that is circulating in the economy (Griffiths & Wall, 2007 p22). This way, the general prices of goods and services in the economy will be lowered, considering that there would be less money in the economy, which cannot support the higher prices. The change of the official interest rate by the Bank of England is applied in the situation where the amount of money that is being spent in the economy has grown at a higher rate, compared to the volume of the output produced, in terms of the goods and services (Qfinance, 2009 p249). Thus, the Bank of England sets an interest rate, at which it lends to the other financial institutions withi n the UK, which in turn affects the interest rates at which such financial institutions, which include the commercial banks, the building societies or the insurance companies, will attach to their loans and mortgages, which they advance to their customers. In addition, the change in the interest rates also affects the prices of other financial assets such as the shares and the bonds, while also influencing the exchange of the country’s currency against those of other countries (Mishkin, 2010, p77). All these changes serve to influence the demand by consumers and businesses, thus affecting the spending that such consumers and businesses make in