The success of the bank of england in running the british economy over the last two years
The Bank of England plays a crucial role in the economic life of England. The bank of England is the central bank of the United Kingdom. Its establishment can be dated back to 1694 and its operations were made national in 1946. In May 1997, the labor chancellor Gordon Brown gave the bank total operational governance. This implied that the bank of England was given the mandate to set interest rates. This was done in an attempt to dissuade and prevent politicians from using interest rates as a political tool, and thereby compromising the economic integrity of Britain. In addition to this crucial function, the banks functions stretch to include management of the governments’ debts and the bank is the principal banker for all commercial banks in Britain including banks like Barclays and HSBC.
The bank of England is also pivotal in the control of gold and handling foreign exchange currency. It is the main controller of domestic and foreign monies managing the rate of new currency. The bank of England is the financial institution which is authorized to bank for the government. It is mandated with the task of implementing policies that are geared towards domestic monies. In addition, the bank of England plays a supervisory role to all other banks and any other financial company in England. All these functions imply that the bank is in every essence mandated with the task of controlling and running Britain’s economy. It is able to control inflation as well as implement strategies which control the trends in the regional and international markets and have an impact on Britains’ economy (Seldon, 2007).
The economy of the United Kingdom is one of the strongest in Europe only coming second to Germany’s. On a global scent their economy is the 5th largest in terms of the international market exchange rates. In 2007, the gross domestic product came in at the 22nd position globally. The contracting of the economy over the last two years has put the Bank of England on the spot over its competency in managing the economy by predicting changes in the economy, and putting in place appropriate measures to ensure the economic integrity of Britain is not compromised (Youngson, 2008).The Bank of England was mandated with this task arising from its years of financial success and credibility. If the bank failed in its role in preventing and controlling inflation and providing a stable forum for Britains’ economic growth it implies that, the bank can no longer be trusted to fulfill this crucial job for Britain.
British economy is at a crisis as banks threaten to collapse due to the various debts which are threatening to collapse the economy. The credit crisis has affected the commercial property and real estate which has been unshaken from the 1990s, is volatile. With the Christmas season coming up the Retail Consortium concluded that things will not be better in the month of December. In their research they discovered that more than four million credit-card customers are yet to clear up the debts they accumulated during the last Christmas season (Youngson, 2008). Businesses are on the verge of collapse as a result of the unwillingness of banks to lend more money to their clients. Though manufacturing enterprises are still thriving, on its own this sector only provides for 15 % of the economy. The turmoil has also extended to the share markets with the shares depreciating drastically in prices (Bank of England, 2007).
In a survey conducted by PricewaterhouseCoopers, researchers stipulated that average households in the UK are using 19% of their incomes to pay debt (Bank of England, 2008). This credit crisis in Britain has affected all aspects of Britains’ domestic economy ranging from finance and housing markets. Analysts from ITEM, predict that these downward spirals will continue for the next two yes and a recovery only eminent from 2010. The effect of a receding economy has translated into a myriad of problems for the residents including the lack of employment, higher prices and lower investments (Bank of England, 2007).
The leading banks such as Barclays and HSBC together with all the other banks are reporting massive losses extending to billions. In the construction sector things have taken a worse turn of events since the last year. Unemployment rates have gone up. All these factors led the treasury to set their economic forecasts for the UK at 2% and not as previously predicted at 3% (Bank of England, 2008).
The confidence of the clients and investors at both local and foreign levels of the market determines the success of any economy. The bank of England does not seem to be doing much in terms of raising investor confidence. This confidence seems to be dwindling at the turn of events at both the UK economy and the main international prospects which mainly include the US economy. The concern at most minds of analysts is to prevent not so much a recession but to avert the seemingly predictable slow growth for the economy ad the resulting inflation. This will in turn result to slow or no growth for producers (Treasury, 2007).
The monetary policy committee is mandated by the government with the task of officially meeting very month in order to come up with appropriate rates of interest for the economy. The inflation target is already predetermined by the government at 2.5% (+/-1%) (Seldon, 2007). Their tasks are to evaluate the current inflation risks and based on their findings they are able to come up with the interest rates which will manage the situation most effectively.
After the debates, the conclusions they arrive at are mostly determined by the macroeconomic development trends in UK including the analysis of demand and output strengths in the market, trends in consumer spending, the housing markets and the developments that can be observed from the foreign exchange markets. In addition they use information obtained from the labor markets including the growth of earnings, a shortfall of specific skills in the market or even trends in unemployment. Incase these findings conclude that the country’s aggregate demand is rising too fast and as a result resulting to an increase in prices, the bank of England must implement measures that will correct for this by most likely increasing the interest rates so that the spending in the economy goes down (Seldon, 2007).
Decisions regarding inflation are very critical and the central bank puts in mind whether there is a threat of increasing inflation if the higher interest rates are not implemented. The bank is compelled to look at all economic indicators including the monetary developments at the local level, the growth of narrow and broad measures of money supply, the trends of banks and other lending institutions, consumer credit, exchange rates, indicators of consumer confidence, the trends of shares in the United Kingdom, increase in the average earnings in the population and the prices in the housing sectors.
Domestic demand went down in 2006 and has been down since then. Retail spending, the housing sector and investment growth took a spiral trend downwards. In terms of housing the prices have gone down by 15% less than they were costing last year. This for the mortgage owners means that their homes cost way less than the money they owe the mortgage companies. A lot of this money that has fallen into negative equity has put the economy on a shaky ground. The high interest rates have impacted the housing market.
Inflation rates have led to less people buying houses since the growth of pay has remained constant. One of Britain’s largest mortgage lenders called the Halifax has experienced dwindling sales as a result of the high interest rates (Seldon, 2007).
Britain has experienced various obstacles and in order to maintain stability in prices, the bank passed five interest rate rises between the August of 2006 and November 2008. The changes were concentrated between August 2006 and July, 2007.From November 2006 to November 2008 the interest rates rose from 4.5% to 5.75%. In April 2008, the Bank of England allowed the base rate to remain constant at 5% in an attempt to prevent increased inflation. The interest rates experienced a high of 5.75% in July to November 2007 and the bank was under various criticisms for failure in what is its main role (Bank of England, 2008).
The increase in the interest rates by the central bank of England was geared towards maintaining the inflation rate near the 2% which is authorized by government. To the mortgage holders and credit holders this has translated to higher prices. The prices of owning a home have gone down by 11% this year and using statistics from mortgage companies the rates of new approval in July, 2008 went down by 71% from those in July, 2007.
The inflation rate has been on an increasing trend for the last two years from 2% in 2006 and part of 2007 to 3% in 2008.The government put a lower target of 2% in 2007 for the inflation of the country. This was lower than the inflation set for 2006. However the rates went down in November of 2007 followed by more down hill trends in February and April of 2008 to 2.5 % (Bank of England, 2008). The bank was also mandated to commit itself in improving the economy and the employment of the people in the United Kingdom. The hold on the interest rates was aimed at the attempt to keep the inflation rates constant although experts indicated that the current rates of inflation were resulting more from the increasing global prices of fuel and food.
The cost of energy and the costs of imports have been on a constant increase for the last two years. The growth of pay remained constant but the inflation of household commodities went up. There was no rise in pay for the population to reflect these changes. In addition the increase of prices in oil and in food prices led to the sharp inflation in Britain over the last two years. As a result, majority of the population have had to result to debts and this translates to a big debt problem for the country. So far oil prices have gone down predicting a lower Consumer Price Index for fuel and food on a global scene (Treasury, 2007).
The limitations that have led to the current trend of events in Britain have arisen from hindrances limiting capital formation, investments and resulting competitiveness and issues that prevent the government from fulfilling its role in ensuring a stable economy arising from proper management of issues like poor debt management and increased global inflation. The Bank of England is relying on the recent fall in inflation to ensure the interest rates remain low and gear the conversion of the economic trend.
British financial institutions have often, in a bid to generate revenue from deposits by wholesale banking, over relied on the Bank of England by not encouraging consumers to save. This implies that for the time of recession, the other banks have been relying on the Bank of England for financial support. In addition to this in March, 2008, the Bank of England introduced a system that allowed liquidation of high quality but illiquid collateral to try and increase the banks lending abilities. This did not work optimally and the funding for the financial institutions remained high.
The bank of England has lowered the interest rates to 3% in a bid to prevent Britain from a deep recession. This is the lowest the interest has gone for the last fifty years. By august, 2008 the prices of oil were 60% higher than in August 2007, gas prices had an upward trend of more than 90% during the same period and food prices had increased by more than 40% average over the same year(Seldon, 2007).
The value of the sterling pound has spiraled by 15% for the period between November 2006 and June 2008. During the last few month however, the sterling lost 5% of its trade-weighted value. This decline has been more evident against the Euro than the United States dollar with the current 15% against the Euro and 4% against the US dollar (Bank of England, 2008).
Increase in unemployment rates is often the first indicator of a receding economy. There are close to two million of unemployed adults in Britain. As a result of poor customer confidence arising from the sates of inflation affairs in US and Britain, fewer investors are willing to invest in Britain. Fewer jobs are being created and unemployment rates have skyrocketed for the last two years. In November 2008 the bank of England cut down the interest rates to 3% more than it had ever done before so that it can prevent the country from entering into a permanent economic recession. There are also more job layoffs resulting to larger numbers of unemployed (Bank of England, 2008).
The economy of Britain contracted by 0.5% between July, 2008 and September, 2008. Britains’ economy though not fairing better than the US economy, is doing much better than its neighbors. This is because of its labor and product markets which have been more flexible than those other countries. The imported workforce has started to leave allowing more jobs for the residents. The high energy prices have continued creating much needed revenue for the government. The role of the bank of England in predicting and preparing the government for the shifts in the global and local economies was not effectively managed. Often times the government has been in loggerheads with the central bank on the way out of the economic mess. There are signs that the economic trends are changing though the exchange rate of the sterling pound has fallen, food prices have gone down and the price of crude oil has also gone down.
- Hm Treasury. 2007. Budget 2007. Building Britain’s Long-term Future, Prosperity and Fairness for Families, Economic and Fiscal Strategy Report and Financial Statement and Budget Report, London: H.M. Treasury publishers.
- Anthony Seldon. 2007. Blair’s Britain, 1997-2007: Cambridge: Cambridge University Press.
- A.J. Youngson. 2008. Britain’s Economic Growth 1998-2007, Columbus: McGraw Hill Professional.
- Bank of England. 2008. Inflation report. London: Bank of England.
- Bank of England. 2007. Financial Stability Report. London: Bank of England.