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The Value of Money

Key terms | IV. Case Study. | VI. Join the halves. | VII. Summarize the following passage in about 100 words and an appropriate | VIII. Write a memorandum. | THE COURT OF DIRECTORS | THE EXECUTIVE | IX. Meanings. | X. Make comments on the following charts, paying attention to the information given below | A Stable Financial System |


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The first objective of any central bank is to safeguard the value of currency, in terms of what it will purchase at home and in terms of other currencies. Monetary policy is directed to achieving this objective and to providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy operates in the UK mainly through influencing the price of money - in other words, the rate of interest.

The price stability objective is made explicit in the present monetary policy framework, which has been in place since the UK left the Exchange Rate Mechanism of the European Monetary System in the autumn of 1992. It has two main elements: first, a medium-term inflation target, set by the Government, of 2S% or less; and second, a commitment to a more open policy-making regime.

Setting monetary policy - decidingon the level of interest rates necessary to meet the inflation target - is a matter for the Bank and the Treasury. Unlike some central banks, the Bank cannot act independently of government. The 1946 Bank of England Act gives the Treasury the power to issue directions to the Bank and, although it has never formally exercised its powers, the relationship is clearly understood to be one in which the Chancellor of the Exchequer takes the final decisions on interest rates. Nonetheless, the Bank plays an important role in advising the Chancellor and is closely involved in the decisions. As part of the Government's move to increase public scrutiny of policy making, the Bank now publishes a quarterly Inflation Report, which provides a detailed analysis of inflation and gives an independent assessment of prospects for inflation relative to the target. The monthly meetings between the Governor and the Chancellor to review the level of interest rates have been put on a formal footing, and the minutes, which include the Governor's advice, are now published six weeks after the meetings take place.

Once policy is decided, the Bank implements it by means of its operations in the financial markets described below. Although the decision on whether, and by how much, to change interest rates is the Chancellor's, the Bank has discretion over the precise timing of the changes. Unless there is a compelling reason to delay, the Bank will act sooner rather than later.


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The Note Issue| Interest Rates

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