Question

Bank Of England Rate Cut

On Thursday, Aug 4, 2016 the Bank of England cut its interest rate to 0.25% -- the lowest it’s ever been in the central bank’s 332-year history. They also announced the government would buy government and corporate bonds (quantitative easing). Check out this article in The Guardian. This is all in response to changes in the economy since the UK voted to leave the European Union in June. What is the central bank trying to do – increase the money supply or decrease the money supply? Why? How would that help the economy? Will it work?

Ethel

Answer 1

The central bank is trying to increase the money supply . Cutting down the interest rate lures investors to take more loans since cost of taking loans is very low . This increases investment spending in the economy , hence money supply grows .

Secondly , government would buy bonds , this will increase money in the economy . Government will buy the bonds and pay the value in return . So this will also increase money supply in the economy .

Expansionary monetary policy is followed during recessionary periods , to provide an impetus to the economt . It helps to increase the growth rate in the economy . Since UK voted to leave the European Union , UK faced massive unemployment and adverse balance of trade . It was done to protect the economy from falling in to recession trap . The effectiveness of the policy would depend on UK trading relations . There should be growth of aggregate demand otherwise such a policy will lead to massive inflation in future .