The UK's monetary policy

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The UK's monetary policy
GBP Coins (Hemera Technologies/AbleStock.com/Getty Images)

The UK follows the majority of democratic countries by operating a monetary system revolving around price stability and an agreed level of inflation set by the UK Government. History has seen the British Government and the Bank of England look for the best fitting monetary policy, which is currently agreed to be flexible inflation targeting programs.

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Central bank independence

With the arrival of the New Labour government of Tony Blair sweeping to power in the 1997 general election the monetary policy of the UK was altered to provide central bank independence. With Chancellor Gordon Brown, Labour introduced the 1998 Bank of England Act granting the Bank of England the right to set interest rates in the UK. Working within the inflation objectives set by the British government the Bank of England sets a monthly interest rate, which must keep inflation within a percentage level agreed with the government. If the inflation rate rises above or below the agreed level by more than one percent the Governor of the Bank of England must write an open letter to the Chancellor of the Exchequer explaining why interest rate policy affected inflation.

Monetary policy committee

Reflecting the partnership between the Bank of England and the UK Government the Monetary Policy Committee meeting each month to set interest rates is made up of Bank of England employees and government appointed people. Five members from the Bank of England meet with four government appointed officials each month for a two day meeting in which interest rates are set. A tenth official also attends the two day meeting from the government department of the Treasury; this Treasury official sets forth the Treasury's view on monetary policy, but has no right to vote on the final interest rate set each month.

Coalition

The UK Coalition Government featuring the Conservative and Liberal Democrat's has maintained the monetary policy of price stability to maintain low levels of inflation. This policy has reigned for UK Government's since 1992 when it was introduced by the Conservative Government of the period; by maintaining price stability the government attempts to ensure the cost of goods and services bought in the UK is not out of step with the rate of inflation. To measure the rate of inflation and the success of UK monetary policy is measured against the cost of goods and services in the Consumer Prices Index.

Inflation

The Conservative Liberal coalition government has maintained an inflation rate of two percent as acceptable in its bid to halt fast rising or falling economic problems. By not allowing the rate of inflation to rise or fall too quickly the government of the UK hopes to see a steady growth of employment and stimulate the growth of the British economy. Since the 2008 financial crash much of Europe has seen a stall in economic growth prompting the Government of the UK to allow extraordinary financial programs to be put forward and introduced by the Treasury and the Bank of england to stimulate economic growth.

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