British Government and the Bank of England

Introduction

The British economy has been among the fast-growing advanced modern economies in the whole world. It is ranked among the first five largest economies in the world. Its rate of growth is mostly determined by various factors which include its population growth, productivity as well as the rate of participation, that is, the portion of adult labor in the labor market. Britain’s economy has been recording an average of 2% productivity rate per annum over a long period (Goodfriend 64).

Britain has a highly industrialized and expanded market-based economy with well-structured social welfare services. The level of government spending in Britain is very high which includes factors such as consumption and transfer services. It’s few restrictions on foreign investments make it a center of attraction to many investors. The country offers employment-generated investments to benefit the less developed regions. It provides incentives to those investing in those areas either in form of grants or as a tax concession. The country’s legislation protects property rights which is a key element in boosting investors’ confidence (Van 229).

Bank of England was formed in 1694. It acts as the central bank in the United Kingdom playing a vital role in enhancing economic stability in Britain. It acts independently from the United Kingdom government; however, the government’s treasury sometimes gives the committee instructions in cases of extreme circumstances. It plays a vital role in the formulation of monetary policy and enhancing economic stability in Britain. It regulates the rates of interest, provides the public with information concerning the monetary policy as well as lending to other financial institutions. Apart from working hand in hand with the British government, It also assists other central banks, especially in Europe. The Bank has been instrumental in formulating the best monetary policies aimed at alleviating the inflation rate whenever pressure increases (Cross, Fisher and Weekend 39).

The success of the British government and Bank of England

Effective collaboration between the British government and the Bank of England has enhanced economic progress especially after the recession that hardly hit many financial institutions in 2008. In 2007, UK stock markets experienced high volatility. Banks had stopped lending to one another dreading that there would be losses from the high-risk US mortgage. This led to a rapid decline in businesses and consumer confidence levels. The international shocks from the global financial crises in 2007 led to a huge recession in the UK. The government had no choice but to work in collaboration with the Bank of England to work out plans which could improve its conditions and enhance the economy (Brunnermeier 83).

The British government is ranked among the first one hundred countries that conform to international standards of macroeconomic policy and data transparency. It attains high levels of compliance when it comes to financial regulations and control as well as the institutional and market infrastructure. Britain’s government has a dedicated Accounting Standards Board which complies with global accounting principles. This has enhanced its credibility and close monitoring of its policies aimed at enhancing economic stability.

Since 2008, the government has been effecting various policies which have led to success. There have been various signs of economic growth for instance; economic growth estimates in 2008 third quarter showed that some of the largest UK’s export markets such as the Euro area and the United States had experienced some growth. That is a clear indicator that Britain had started moving out of recession in 2008. Business surveys in Britain reported an increase in the confidence level and consumer spending by the end of 2008. In the same year, it recorded a recovery of 2.8%, and generation of 340, 000 new jobs in the private sectors by the first half. Unemployment had begun to level from three million in 2007 to around two and a half million by the end of 2008 (Van 301).

Monetary policies of the British government in collaboration with the Bank of England have been highly regarded by the IMF. In its report in 2008, the Bank of England (BoE) announced its commitment to enhancing stability in prices and confidence in the currency. It went ahead and implemented a new information technology system which was implemented in the year 2009 which has significantly enhanced transparency and elevated its service delivery level. Through its website, the Bank has been able to enhance its service delivery and provide vital data on monetary policy issues (Caballero and Krishnamurthy 2203).

International Monetary Fund (IMF) reports on the evaluation of Britain’s policy approach in 2008 stated that the objectives laid down on the policies had been significantly achieved. Sustainable investment rules laid out, for instance, had reinforced anti-inflationary recommendations, maintained sustainability as well as creating some grounds for dealing with long-term pressures (Brunnermeier 82).

Macroeconomic policies

For the last two years, the British government together with the Bank of England has come up with various macroeconomic policies to enhance the stability of the economy especially after experiencing shocks due to international financial crises. The British government noticed that the traditional monetary policy was less effective. It, therefore, has been pursuing non-traditional policy instruments to create greater liquidity and credit. Together with the monetary policy, effective fiscal policies have been formulated by the Britain government to check on inflation. Implementation of these policies has been something that the British government and the Bank of England keenly strategized and strictly monitored. The government agencies have been at the forefront working tirelessly to reinforce the implementation of the formulated policies.

Monetary policies

Monetary policies are formulated to enhance the economic stability of a country. The UK government has pursued aggressive and eccentric monetary policy measures in collaboration with the Bank of England to stamp out the most terrible outcomes that resulted from the global economic crises. The economy had been impacted negatively as a result of the financial panic that faced many investors and institutions. The Bank of England came up with Quantitative Easing policies (QE) aimed at deterrence of deflationary spiral and the successive improvement factors such as credit conditions, asset markets, and expectations of inflation. These policies in a significant way helped in the improvement of fiscal policies. These QE were undertaken in early 2009. By then, credit markets had experienced a lot of challenges as well as liquidity disappearing. Interest rates were being aggressively cut; however, the shocks were so severe that they hindered the positive impacts intended by the interest rates cut. QE measures were meant to re-establish normalcy in the credit markets. By pursuing these policies, the Bank of England aimed at lessening uncertainty and advancing adequate liquidity for businesses to go through. This has saved the market from collapsing (Goodfriend 53).

The Bank of England has been tightening its monetary policy since 2008 in the wake of the rising inflationary pressure. The British government together with the bank of England has been taking more stringent strategies by putting quantitative targets for reserve. The targets were raised to check on the growth, the money supply was elevated as the inflation rate amplified. The British government has been using aggressive open market operations to sustain market liquidity at a level that is not contrary to the reserve money objective (Brunnermeier 81).

The Bank of England did not alter the rates of interest in 2008; instead, it opted to take quantity control strategies. The Bank raised the Repurchase rate to 10.50%and the reverse repurchase rate to 12.00%. Between 2008 and 2009, the weighted average rate of Open Market Operation repo auction has been varying between 10.40-12.00%. The lending rates and deposit rates have been rising since 2008 (Caballero and Krishnamurthy 2201).

The bank also introduced the Special Liquidity Scheme to supplement liquidity operations in 2009. This was a system that was aimed at long-term exchange mortgages and backed securities on the side of the bank and government bonds as the other part. This system was established to eliminate the hustles of borrowing from the central bank through the bank’s facilities set aside for emergency lending (Brunnermeier 95).

The bank also came up with tight liquidity insurance and collateral policy in 2010. Liquidity insurance introduced by the Bank of England enhances the stability of the UK’s financial system. Building societies and commercial banks’ provision of services benefits the economy in a major way. However, several risks are posed by the nature of their service provision. For instance, if investors suddenly lose confidence depositors may be tempted to withdraw their deposits within a short period. For this reason, the Bank has tightened the provision of liquidity insurance by making preparations to lend banks against collaterals that have been selected as worth (Goodfriend 61).

In 2009, the UK government pursued a non-conventional policy, that is, direct provision of liquidity to borrowers especially in situations where the credit markets are not well functioning. The government also enabled the buying of mortgages backed by securities to lessen the flows of the credit thus improving the balance sheets of many financial institutions (Van 223).

Fiscal policy

Fiscal policies are instruments used to eliminate the output gap in a country’s economy. The fiscal stimulus includes government expenditure such as its spending on infrastructures such as roads and bridges as well as public investments. This stimulus sometimes creates a budget deficit. The government steps in and formulate some policies aimed at correcting the deficits which may be existing (Blundell 33).

The UK has been using expansionary fiscal policy for the past few years to mitigate the impacts of the economic crisis. Britain has enacted various spending initiatives since 2009 which are estimated to be worth 1.5% of the GDP. These initiatives are aimed at stimulating the aggregate demand of the country. The reasons for taking up those initiatives were based on the fact that an increase in government spending leads to a shift of the IS curve to the right. That implies that the output increases. The other reason was that the use of monetary policies had resulted in a situation whereby Britain fell into a liquidity trap in 2007 thus the policies could not stimulate further investments. Labour declared in 2009/2010 Britain budget a long-term plan to curb the shortfall by plummeting departmental funding by 2% by April 2011 (Blundell 32).

In 2009, the British government sold some of its new debts directly to the Bank of England which in return aggravated the money supply through the provision of credit to the government. The reason for this was to ensure that the government debt which was held by the public would not increase to the extent that it is held by the Bank of England. The government was by then avoiding inflation. Since the Bank of England was committed to a low-interest policy thus, it bought some debts in the market to maintain the rates of interest’s objectives (Caballero 2199).

To stabilize the tax rate to its pre-crisis level, the British government embraced a counter-cyclical policy by reducing Value Added Tax (VAT) FROM 17.6% TO 15% between the years 2008 and 2009. The aim of pursuing this policy was to attain sequential elasticity of substitution as well as restore the tax rate to a position it was before the global financial crises in 2008 (Blundell, 37).

The British government has significantly enhanced the code of fiscal stability which was formulated in the labor policy. This code clearly outlines the government’s commitments to the management of public finance. Its motivation to pursue this policy included enhancing stability in the economic sphere to enable economic growth and prosperity of employment. It was planned to tackle the limitations in the fiscal policies. The code plays a major role in enhancing accountability and transparency in the implementations of the fiscal policies as well as advancing important information to the public. The general idea was that government would change its utilization of the borrowed funds. That code ensures that the British government only borrows to invest and does not utilize the funds in the current spending. The code also reinforces the sustainable investment rule in Britain. The code plays a major role in enhancing the public sector’s net investment. Making fiscal and debt management policy, the British government took into account the effects of finance utilization on the future generation (Cross, Fisher and Weekend 40).

Conclusion

Macroeconomic policies are vital components in any nation globally. They ensure that a country’s economic endeavors run smoothly as well as enhance stability. Britain has recently been using both convectional and non-conventional monetary policies on the verge of stabilizing financial institutions. The British government in conjunction with the Bank of England has implemented these policies to save the country from the shocks created during the global economic crises which hardly hit many industries and financial institutions. The British government is among the most developed countries globally. Its formulation and implementation of these macroeconomic policies have significantly enhanced its success in many key areas. It has been ranked by the International Monetary Fund as one of the efficient countries in terms of stabilization of the economy. In the last two years, its formulation of various policies and their implementations has ensured its success. It emerges as one of the most successful countries in Europe. Through the pursuit of both monetary and fiscal policies, the British government together with the bank of England has enhanced regional economic growth.

Success in its monetary policies is evidenced by its ability to sustain stable rates of interest as well as enhance credit creation in the financial sector.

Works Cited

Blundell, Richard. “Assessing the Temporary VAT Cut Policy in the UK.” Fiscal Studies. 39(1), 2009: 31-38.

Brunnermeier, M. K. (), ‘Deciphering the liquidity and credit crunch 2007-8’, Journal ofEconomic Perspectives, vol. 23(1), 2009: 77-100.

Caballero, R. J and Krishnamurthy, A. ‘Collective risk management in a flight to quality episode’, Journal of Finance, vol. 63(5), 2008: 2195-2230.

Cross, M, Fisher, P and Weeken, O. ‘The Bank’s balance sheet during the crisis’, Bank of England Quarterly Bulletin, Vol. 50, No. 1, 2010:34–42.

Goodfriend, Marvin. “How the World Achieved Consensus on Monetary Policy”, Journal of Economic Perspectives 21(4), 2007: 47-68.

Van den, Heuvel. ‘The welfare cost of bank capital requirements’, Journal of Monetary Economics, vol. 55, 2008: 298-320.