UK monetary policy: Is

The main instrument of monetary policy in the United Kingdom is the use of interest rates set by the MPC. The theory is that interest rates are very effective to control inflationary pressures. The relative success of meeting the inflation target of the government in the last 7 years suggests that this demonstrates the effectiveness of monetary policy.

In short, the raising of interest rates helps to reduce aggregate demand in the economy. When interest rates raises a number of things that are affected.Firstly those who have a higher monthly mortgage payments, the reduction in disposable income and reduce expenditure. Secondly, there is a greater incentive to save money instead of spend. Third of those of other forms of debt are affected by higher interest payments, but people stop buying on credit. Therefore, in principle, the interest rate increase will reduce demand and prevent the economy overheating. This allows the inflationary pressures that aretenuous.

However, there are several factors that make interest rates less reliable as an instrument of monetary policy.

1. First, there is a period of time before interest rates have an effect. These loans will not stop spending just by increasing interest rates. However, in future, could discourage people from lending and investment because of high interest rates. Estimated rates of interest may take up to 18 months for its effects. Therefore, monetary policyis preventive. The MPC try to predict the evolution of future inflation and changes in interest rates before inflation.

2. Relative to this last point is difficult to predict trends of future inflation. For example, detailed information on the current state of the housing market is often difficult to obtain. While the statistics on the current state of the housing market are difficult to obtain, which shows how difficult it is to predict the futurestatistics, house prices (a quick look at the forecasts of house prices shows a broad spectrum of forecasts)

3. Interest rates have different effects on different types of consumers. In the event of rising interest rates, mortgages with a big doubt again feel painful fiscal tightening. Even a quarter of a% can have a significant impact on your monthly payments. However, it should be noted that a large% of the population has no mortgage payments too high. Have goodconducted much of their loan or lease. Thus, higher interest rates cut spending, but only a certain segment of the population. Those who have large savings in May feel better, because there is an increase in interest payments each year.

4. Depends on consumer confidence. Higher interest rates may reduce the disposable income of individuals, however, they are very confident about the prospects for future profits can not reduce spending, trust is veryimportant factor for the effect of consumer spending, may have an unknown effect on monetary policy in the United Kingdom.

5. The higher interest rates have an effect on E, which increases its value making it more difficult for exporters. Again, what is often a perverse effect of monetary policy. Therefore, monetary policy often has a more than proportional effect on production and exports.

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