It was anticipated that the Bank rates of the Bank of England 2008 would help in curbing inflation. Hence, the Monetary Policy Committee decided to bring about changes in the bank rates. The article below highlights the same.
The Bank of England Act 1998 empowers the Bank of England to fix the interest rates so that the inflation target of the Government is met. The Monetary Policy Committee of the Bank of England or BoE takes care of the �operational decisions� of the Bank.
It has been observed lately that the financial markets have been subjected to a lot of stress. This was true mainly for the ABS or the asset backed securities.
The Banking Sector in England:
The Interbank money market in England manifested disparities or spreads in unsecured interest rate pertaining to policy rates (expected). It was ascertained that conditions for funding for the banks in United Kingdom had improved marginally. However, it was not too late when reports suggested that liquidity conditions showed a downward trend and that liquidity was being eroded.
Bank of England Responded By:
As of February 2008 the Bank Of England reduced the interest rate by as much a quarter point. This step was taken as a measure to respond to the sluggish consumer spending. Mervyn King, the Governor, decreased the bank rates of the Bank of England 2008 to 5.25%. This was the second time the Government took the step of decreasing the interest rate within a span of three months. However, this decrease was anticipated and majority of the economists had predicted this.
The various banks of England have stopped lending out money to the consumers. The reason for doing so was that the banks had suffered huge losses amounting to $146 billion. Reports suggest that approvals for mortgage loans in the United Kingdom dropped to the maximum since the year 1999. The BoE treaded cautiously as far as reducing rates were concerned. This was in sharp contrast to the step taken by United States of America, where the rates were reduced rather drastically after the stocks nose-dived globally.
The bank rate decreased to 5.25% followed a 9% decline in FTSE 100 Stock Index. This decline was the biggest drop in the past 5 years. Among a Group of Seven countries, benchmark rate of United Kingdom is the highest. As an aftermath of the bank rate reduction pound dropped by 0.3% and was found trading at $1.9482.
Last Updated on : 30th July 2013