How Inflation Targeting Operates in the Uk and Critically Evaluate the Benefits of Inflation Targeting
Introduction
“Inflation targeting is a monetary policy strategy used by central banks for maintaining prices at a level or within a specific range.”Financial Times (n.d.). The Central Bank meets the preset targets for the annual inflation rates by changing interest rates. Inflation and interest rates are closely related. The Central Bank, therefore, uses interest rates by lowering or raising them to the set target. For example, the bank will raise interest rates if inflation looks like it is above the target or lowers interest rates if inflation is lower than the target.
In May 1997, UK’s new Government announced that the Bank of England in the country would be operated independently. A Monetary Policy Committee was set up under the Bank of England Act, which is responsible for interest rates decisions even though the Government determines the policy objectives. There are 9 members in the MPC, including the Governor of the bank, 2 Deputy Governors, 2 Bank Executive Directors and 4 external members assigned by the Exchequer’s Chancellor. The principal statutory duty of the Committee is to stabilise prices. This is defined with reference to the target for annual retail price inflation excluding payments for mortgage interest rates (RPIX). A letter by the Chancellor at the year of 1998, defining MPC’s submission states that the inflation target is maintained at 2.5 % at all times. A target may be missed by more than 1% on either side, in which event, the Governor as chairman of MPC writes a letter to the Chancellor explaining why they did not reach the target and the remedy action that is to be taken. Until 2004, the inflation target switched to 2%, which based on the Consumer Price Index (CPI) from the previous RPIX target of 2.5%. In addition to MPC’s responsibility of price stability, it must also support the Government’s objectives for growth and employment together with the Government’s economic policy.
MPC conducts its affairs in a transparent
“Inflation targeting is a monetary policy strategy used by central banks for maintaining prices at a level or within a specific range.”Financial Times (n.d.). The Central Bank meets the preset targets for the annual inflation rates by changing interest rates. Inflation and interest rates are closely related. The Central Bank, therefore, uses interest rates by lowering or raising them to the set target. For example, the bank will raise interest rates if inflation looks like it is above the target or lowers interest rates if inflation is lower than the target.
In May 1997, UK’s new Government announced that the Bank of England in the country would be operated independently. A Monetary Policy Committee was set up under the Bank of England Act, which is responsible for interest rates decisions even though the Government determines the policy objectives. There are 9 members in the MPC, including the Governor of the bank, 2 Deputy Governors, 2 Bank Executive Directors and 4 external members assigned by the Exchequer’s Chancellor. The principal statutory duty of the Committee is to stabilise prices. This is defined with reference to the target for annual retail price inflation excluding payments for mortgage interest rates (RPIX). A letter by the Chancellor at the year of 1998, defining MPC’s submission states that the inflation target is maintained at 2.5 % at all times. A target may be missed by more than 1% on either side, in which event, the Governor as chairman of MPC writes a letter to the Chancellor explaining why they did not reach the target and the remedy action that is to be taken. Until 2004, the inflation target switched to 2%, which based on the Consumer Price Index (CPI) from the previous RPIX target of 2.5%. In addition to MPC’s responsibility of price stability, it must also support the Government’s objectives for growth and employment together with the Government’s economic policy.
MPC conducts its affairs in a transparent