USMAN NASEEM
02341785
FINANCIAL SERVICES
FINANCE AND MONETRY SYSTEM
INTEREST AND INFLATION
ASSIGNMENT
Interest Rates have been set by the bank of England ever since it was granted operational independence in May 1997. These interest rates represent the rate of interest paid on money borrowed and also the rate of return on money saved. The task of setting the rates is given to the MPC ( Monetary Policy Committee), over the years these rates have differed based duly on certain requirements and factors set by the government. For example, it is the governments desire to maintain a stable economic system, price stability, a low inflation rate and a stable value of its money. The current target by the UK Government for Inflation is 2%. In the following brief I will discuss and propose how I would seek to set or influence interest rates in the economy to achieve Inflation at or around our target of 2%.
As mentioned above the decision taken by the Bank of England in regards to the setting of the interest rate has many factors contributing to it. This inflation target is expressed in terms of an annual rate of inflation based on the consumer price index (CPI). It is not the aim of the MPC to achieve the lowest possible inflation rate due to the fact that a lower rate of inflation can be just as bad for the government’s economic objectives as being above the 2% target.
Inflation can be defined as a persistent increase in the general level of prices. It is not affected by the rise of prices of one or two goods but affected by the increase or decrease of a weighted average. The average is defined by a basket of goods and services using either Retail Price Index (RPI) or Consumer Price Index (CPI). RPI uses more widely defined basket of goods and ...