The Bank of England Essay

The Bank of England was established in 1694 and was founded by Scotsman William Paterson, it was later nationalized in 1946. The bank performs all duties of a central bank and it forms the basis of the banking system in the UK. In the sense that it is a central bank, some of the functions that are performed by the bank of England are:

It is the banker for the government
It is a banker of commercial banks
It is a store and reservoir for resources e.g. gold and foreign exchange.
It manages the government debt
Controls the issue of the country currencies e.g. coins and notes.
It ensures and supports the implementation of domestic monetary policy

The Monetary Policy Committee (MPC) carries out its main duties and responsibilities and Mr. King currently manages the bank. One of main duties that is carried out by the MPC is deciding the interest rates that the economy should apply under the guidelines of the existing market conditions. This interest rates affects the economy adversely and mostly in the domestic monetary markets especially the share market, mortgages and lending figures. Other duties includes monitoring the exchange rate statistics, the demand and output data and the labor or employment market, which contributes to the determination of the general economic growth. Thus, the paper analyzes how this bank has accomplished the duties that it is accorded with the employed of different macro-economic policies.

Policies that have been developed by the bank in relation to inflation rate are not reliable to some extent. The bank is estimating that the inflation rate for the period of 2008/2009 is estimate to be 2%. However, the same expectation was drawn out in 2006 which resulted to inflation rate been 4.7%, a diverse expectation compared to the predicted 2% at that time. The current policy on inflation has been termed as a plan by political elite to fulfill their dreams.

The organization is currently on the eyes of most financial institutions and people, due to the effect of the current financial crisis in United States. This means that the economic policies that the bank of England will determine, will then determine the extend of impact the greater UK will have to shoulder. Moreover, the crisis has come just after the criticism of the Consumer Price Index (CPI) that resulted to forecasting processes over the past two years.

The forecast the bank carried out for the financial period of 2007/2008 and mostly of the CPI of inflation of 2% proved to be wrong. This forecast was carried-out in October 2006. However, the CPI inflation of this period turned out to be above 4% contrary to the public and financial institutions expectations. Moreover, the 2% inflation that was predicted back, for the period 2004 -2008, the predictions was not successful. Generally, by May this year the bank is estimating that inflation will be more than 3.7% (Osborne 2008, p. 66).

In addition, according to the statistics of June last year it has shown that unemployment has decreased according to its statistics. However, through critics and current financial crisis the rate of unemployment has drastically increased. This is so because many organizations are firing people rather than employing and they are going for the temporary staff. The statistics and data show that the rate of unemployment is approximately 21.2%, which is the second highest after the unemployment statistics of 1997. This statistics revolves around those people who are in the working level bracket e.g. the people are not working in voluntary disciplines.

Statistics that are obtained from the Office of National Statistics (ONS) shows that the unemployment levels have decreased by 45,000 people in a period of three months. This means that these people have obtained jobs because of immigrant workers and women who are returning from there maternity leave. However, there are chances that these people and other more are likely to loose there job. Moreover, there are analysts who recommend that if the rate of inflation is within controlled limits (2%) more than 60,000 persons will have to loose there employments. Additionally, there are statistics that show that the number of people who have lost there jobs has increased continuously for the three months that showed that employment had increased. This information is obtained from the Jobseeker’s Allowance, which shows that unemployment has climbed by 7,200 to a record high of 806,300 per the month of April 2008. Generally, the persons who are not employed stands at 1.65 million people (Osborne 2008, p. 67).

However, this statistics faces the wrath of critics that say that this statistics are to some extend not conclusive.  The critics’ argue that the statistics are obtained only from the persons who apply or receive unemployment benefits. Thus, the critics’ say that most people who are not employed do not seek for the benefits, rather they depend on someone or other people or seek other forms of benefits such as the incapacity handouts. Hence, this means that the bank of England does not account to the current happenings that contribute to the growth of the inflation rate that is witnessed in the past two years.

Since 2007, United Kingdom has been experiencing the increase in nominal wages. This makes the people who are working to think that the income that they can use has increased. Hence, this has hidden the issue of inflation and belief that they are making more incomes than before and is obtainable for use. However, when the nominal wages that they receive is factored with the size of inflation shows that the wages and salaries that they obtain is decreasing rather than increasing. Thus, such belief by the population that the income is increasing ensures that the demand holds for some time especially on the household goods.

Nevertheless, the population has decreased the rate that they purchase the household goods. This has not resulted from realizing the issue of inflation but the financial complexities in the United States. This means that the population draws its decision-making basis from the fall out reaction that is occurring in the US and fear that the same scenario may occur in the United Kingdom. Hence, through the inflation that the Retail Price Index obtained in April 2007 stood at 4.5%. This percentage has continued with minor fluctuations through out until this year and has remained below the 4.5% over the same period (Eberle 2008, p. 68). Furthermore, the growth in terms of the pay that the persons who are working at the same period is slowing in its growth and usually as remained below the Retail Price Index (RPI). Hence, when the customers and the population realize where they stand in relation to the pay that they obtain and the cost of the household goods will tend to reduce the demand in the near future.

The impact on the global banking, which resulted, to the credit crunch and the mortgages has not spared the bank of England. The bank had to cover up some banks and mitigate its survival and an example is the Northern Rock bank that faced a credit problem in November 2007. The credit crunch in the Northern Rock bank made many customers to queue long queues to withdraw cash hastily. The Northern Rock bank was not able to access credit to be able to run its mortgage business. The governor of the bank had initially stated that the Bank of England would not rescue any financial institution the way that the Federal reserve of US had done.  However, the bank rescued the Northern Rock bank. The rescue came later when the confidence and trust of the Northern Rock customers was low. This means that if the bank had mitigated the crisis early enough the adverse effects could have not been felt that much.

Through the data that is obtained from Voca it has been shown that the amount of take home pay by the working class population is declining. The problem is double up by the effect of inflation that has made the cost of basic goods to increase, which translates to increase in cost of living. This means that the inflation that is associated with the bank of England is 3.1% as at March 2007, which is different from the rest of Europe that stands at 2.2% (Eberle 2008, p. 67).

In most instances, markets are usually unpredictable, at the same time erratic, and are usually indicated by the market forecast that is usually more realistic. This means that the bank of England should not blame the market forecast in there failures in ensuring that the economy is at the right path. However, so far the bank of England has assisted in many financial institutions when it comes to financial crunch by advising and lending them finances. Additionally, the bank of England has ensured that the financial difficulties that are witnessed in United States in developing the right policies and instituting the right measures that fully address any impact of the financial crunch (Clammer 2008, p. 323).

There are major fears that make the economy to deteriorate and worsening situation in the UK and the whole globe. Markets are registering minimal to negative growth in fear of the coming years. Consumption by households is falling; depositors are making hasty withdrawals; investors are shying away from the stock markets; employment levels are on the decline; the housing and mortgage departments are on the verge of collapsing. The world is in a crisis we admit or we do not. What are some of the macroeconomic policies that the Bank of England in its capacity as the country’s central bank employing to revert the situation?

An example of macroeconomics that has been developed by the bank of England is in the field of the interest rates. The bank of England is advancing cutting of the interest rates to sustain the economy. The cut in the interest rates has ensured that the people, mostly those in mortgages, have extra cash and have flexible ways that they can borrow the cash or repay the loan. Moreover, the prices of the goods are likely to fall. The interest rate is continuing to fall below the 5% that was initially charged (it reduced by 0.5% to the current 4.5%). This will decrease the level of inflation to the expected or forecasted of the 2%. Other institutions will have to follow suite while the issue of savings, which usually moves with the interest rate, will play an important role in attracting of customers by the banks (Clammer 2008, p. 324).

Since its incorporation, the bank of England as becomes the corners stone of all banks in the United Kingdom and the entire world. Financial management is a trick and complicated issue that requires advanced knowledge of macroeconomics and deliberating the sustainability of the economy. Furthermore, the current credit crunch in the United States as spilled into many countries resulting in diverse consequences to the sustaining of the economy.

The bank of England has developed right policies that have resulted in different levels of success and failures. Mitigations of financial institutions problems and benefits to the interest rates cut have ensured that the effect of the credit crunch is within controllable levels.

Bibliography

Aveli, N. 2007, ‘Analysis of Bank of England’. Financial Journal, vol. 31, no. 4, pp. 755 – 778.

Clammer, P.  2008, ‘Credit Crunch Impact in United Kingdom. Convergence, vol.14. pp. 323   – 333

Cox, L. 2007, ‘Review: The Bank of England’. Thesis Eleven, Nov., 91. pp. 148 – 152

Eberle, J. 2008, ‘Globalization and Banking Institutions’. Annals of Quantitative Research, vol.             17, no. 3, pp. 66 – 70.

Melvin, B. 2007, investing in the UK stock markets, Economic Journal, March, pp. 483-496

Osborne, L. 2008, ‘Financial Institutions in United Kingdom’. Times Journal, vol.  68. pp. 63 –            70.

Smith, E. 2007, ‘Interest Rates in United Kingdom’. Technological Journal, vol. 34, no. 3, pp. 690 – 708.

Appendixes

GDP Graph

Inflation Graph

Consumer Spending