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Bank of England and Britain economy Essay

Introduction

The last two years has been the critical years for Britain economy. Many questions arises regarding the performance of Bank of England, here we will describe the performance of Bank of England and the macroeconomics policies by the government. The United Kingdom is measured to be ? leading trading supremacy and financial centre.

Its economy is one of the largest in the world as well as one of the strongest in Europe, with an annual GDP volume of over US$1 trillion. The country has ? mature, industrialized market economy with ? declining traditional manufacturing sector balanced by ? vibrant, fast-growing services sector that is led by world-class banks and insurance companies and emerging technology companies. (Balls and Donnell 2002 117-28)

With significant North Sea reserves, the United Kingdom is also ? major European oil and natural gas producer and exporter. In the 1980s the United Kingdom initiated structural reforms aimed at facilitating flexible and product markets in response to technology changes and shifted to ? more services-oriented structure of demand.

? series of changes in macroeconomic policy institutions in the 1990s ensured and strengthened the benefits of the structural reforms — including the introduction of inflation targeting, Bank of England independence, and fiscal adjustment. These changes also resulted in ? strong countercyclical response to the economic slowdown between mid-2000 and mid-2003, as domestic demand supported ? steady growth in economy. In the past decade, the United Kingdom has had its longest period of uninterrupted growth since World War II. This growth has been mainly attributable to confidence-enhancing policy frameworks and generally sound implementation. (Wyplosz 2005 191)

Macroeconomic performance has been strong and steady, marked by continued economic expansion, falling unemployment, and sustained low inflation. Following ? slowdown in 2005, GDP growth accelerated in 2006 with the rebounded growth of investment, productivity and output. Although the near-term and medium-term outlook remains favourable, the recent increases in inflation and the current account deficit need to be watched as possible signs of capacity constraints. (Boero, Smith and Wallis, 2007 3-78)

Also, efforts should be focused on continued strong and stable growth and inflation targeting. While the United Kingdom has benefited from the opportunities of globalization because of its economy’s openness, global shocks also have ? strong impact on the country. In this regard, appropriate and adequate fiscal and monetary policy responses are crucial to reduce the adverse impact of external shocks. (Budd 2004 11-16)

Bank of England and Macroeconomic indicators

The independent actions taken by the MPC have lead to the greater stability of price levels in several ways. Rather than an individual held responsible for setting short-term interest rates previous of the 1998 Bank of England Act, currently the responsibility of changing the short term interest rate falls on the nine committee members of the MPC.  (Clements 2005 44-49) Gordon Brown set the target inflation rate of 2.5% from 1998 to 2000, and as of 2000 the target for the MPC is 2.0% (King).

The MPC has stuck as close to the target as possible, the greatest difference being 25 basis points under the target (2.25) (). In the 1970s, inflation averages over 13% ? year, and it peaked 27% in August 1975. (Balls and Donnell 2002 117-28) During the 80s inflation averaged 7% ? year. In the past, instability has contributed to UK’s poor growth performance, by holding back long-term investment that is the foundation for successful economy .Price stability is one condition for high and stable levels of growth and employment. (Monacelli 2003 227)

Over the past decade, the United Kingdom’s macroeconomic performance has been strong and steady due to confidence-enhancing frameworks for monetary, fiscal, financial and structural policies, as well as generally sound implementation. With economic action above prospective in 2004, some easing of real GDP growth and rise of inflation in 2005 were expected. However, the slowdown in growth and rise in inflation were sharper than envisioned. (Boero, Smith and Wallis, 2007 3-78)

Real GDP growth slowed to 1.9 percent in 2005 from 3.3 percent in 2004 mainly due to ? fall in private consumption growth, reflecting the cooling of the housing market, previous monetary policy tightening, and rising personal income tax. Inflation rose to 2.1 percent in 2005 from 1.3 percent in 2004, owing to supply constraints and the sharp increase in energy prices. (Wyplosz 2005 191)  In 2006, economic growth accelerated driven by strong domestic demand and exports. Real GDP was estimated to grow 2.7 percent in 2006, and the growth was broadly based.

Business investment was boosted by high rates of return; residential investment by an Uptick in house price appreciation; private consumption by robust employment growth, steady wage growth, and rising household wealth; and exports by the recovery in the Euro area. However, inflation continued to rise in 2006, reaching 3 percent at end of the year, mainly due to higher energy prices. (Boero, Smith and Wallis, 2007 3-78)

? substantial fiscal expansion in 2001-2004 led to ? sharp deterioration in the fiscal position, with the fiscal balance turning from ? surplus of 3.9 percent of GDP in 2000 to continued fiscal deficits. The fiscal performance improved in 2005 and 2006 due to higher revenues from the financial and energy sectors, as well as from ? higher tax rate on North Sea firms. As ? result, the fiscal deficit declined from 3.2 percent of GDP in 2004 to 2.8 percent of GDP in 2005 and 2.5 percent of GDP in 2006. (Boero, Smith and Wallis, 2007 3-78)

Government performance ‘Who is the responsible’

In the second quarter of 2004, the working age employment rate was 74.6% compared to the second quarter of 2005, which had ? working age employment rate of 74.4%, 0.2% lower than the previous year’s rate. The unemployment rate in the second quarter of 2004 was 4.8%. However, in the second quarter of 2005, that had dropped 0.1% to 4.7%. So there are fewer people out of jobs this year than in 2004.

There are also 216,000 more people in employment in 2005 than in the preceding annum. Despite that huge increase, there are still 37,000 more economically inactive people in 2005 than in 2004. The redundancy rate this year is at ? record low since records began back in 1995 and there are 8.4 million more hours per week worked this year compared to last year. (Boero, Smith and Wallis, 2007 3-78)

The United Kingdom’s current account balance has been in persistent deficit over the past decade, albeit ? relatively small one in relation to GDP. With its long history as ? mature creditor nation, the country enjoys healthy net foreign investment income inflows and strong service business export credits. While the United Kingdom has surpluses in the services balance and net factor income balance, its merchandise trade balance has been in relatively large deficit due to its large appetite for imported goods. The country also runs ? persistent deficit in the current transfers balance owing to large number of remittances sent home by foreign workers employed in the U.K. (Budd 2004 11-16)

Conclusion

In 2005, import growth slowed as domestic demand decelerated. However, ? drop in net services inflows (due in part to insurance payments related to Hurricane Katrina in the U.S.) led to ? widening of the current account deficit to 2.4 percent of GDP in 2005 from 1.6 percent of GDP in 2004. Strong import growth led to continued widening of the current account deficit to an estimated 2.9 percent of GDP in 2006.

Overall the macroeconomics policies of Britain have been on the line, and the Bank of England has performed satisfactory. But due to internal matters of government where they handle with the left parties, it becomes difficult for continuing macroeconomic policies for the government.  (Wyplosz 2005 191)

References

Balls, E. and O’Donnell, G. (2002) Reforming Britain’s Economic and Financial Policy: New York, Palgrave, 117-28.

Monacelli, T. (2003), ‘Monetary policy in a low pass-through environment’, Working Paper No 227, European Central Bank

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Wyplosz, C. (2005), ‘Fiscal policy: institutions versus rules’, National Institute Economic Review, 191, January.

Budd, A. (2004), ‘Black Wednesday: a re-examination of Britain’s experience in the Exchange Rate Mechanism’, 34th Wincott lecture, October, Institute of Economic Affairs, 11-16.

Boero, G. Smith, j. and Wallis, K.F. (2007a) uncertainity and disagreement in economic prediction: the Bank of England Survey of external forecasters, Economic journal, forthcoming, 3-78.

Clements, M.P. (2005), Evaluating Econometric Forecasts of Economic and Financial Variables, Basingstoke, and Palgrave Macmillan, 44-49.

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