Monetary policy is central government or other policy to stimulate or otherwise influence economic activity by influencing money supply or interest rates.
Historically, mechanisms for influencing the money supply have included the use of open market operations, quantitative easing, the central bank discount rate and reserve requirements.
UK monetary policy
In recent years the primary objectives of UK monetary policy have been 'stable prices' and confidence in the currency, collectively known as 'monetary stability'.
'Stable prices' are defined by the UK government's inflation target, currently 2% per annum as measured by the UK Consumer Prices Index (CPI).
The objective is to keep inflation close to the target, neither too high nor too low. If inflation moves away from the target by more than 1% in either direction, additional corrective actions will be taken.
Subject to the primacy of the inflation target, the secondary objectives of monetary policy in the UK are to support the government's other economic objectives, including those for growth and employment.
Responsibility for setting UK monetary policy - to achieve monetary stability - lies with the Bank of England's Monetary Policy Committee (MPC).
Monetary policy in the UK has usually operated through setting the Bank of England's interest rate, the Official Bank Rate, or 'Bank Rate'.
The Official Bank Rate is sometimes referred to as the 'Bank of England Base Rate'.
Quantitative easing in the UK
In 2009, in addition to setting Official Bank Rate, the MPC started quantitative easing (QE).
This means injecting money directly into the economy by purchasing financial assets.
QE is designed to stimulate the economy further, beyond what could be achieved by low interest rates alone.
- Bank of England
- Bank Rate
- Consumer Prices Index
- Discount rate
- Effective lower bound
- Financial Policy Committee
- Financial stability
- Fiscal policy
- Inflation target
- Interest rate
- Monetary Policy Committee
- Money supply
- Official Bank Rate
- Open market operations
- Quantitative easing
- Reserve requirements
- Sterling Monetary Framework
- Supply side policy
- Unconventional monetary policy
- Zero lower bound
- ZLB problem