Money Target Policy in the UK: Analysis of Inflation and Rates

This essay provides an evaluation of the United Kingdom's monetary policy, specifically its money target policy, from 2016 to 2018. It examines the trends in inflation and interest rates during this period, noting the rise in inflation and the subsequent increase in interest rates implemented by the central bank to counter it. The essay also discusses the UK's economic standing as a leading nation with a free economy, attributing its prosperity to effective macroeconomic policies. It highlights the central bank's use of interest rates and quantitative easing as key tools. While acknowledging the successes of the UK's monetary policy, the essay points out the need for further reforms, mentioning the government's plan to lower interest rates to a stable 2.0% to stimulate economic growth alongside managing inflation. The analysis incorporates graphs and tables to illustrate the trends and concludes with a summary of the UK's economic position and future policy directions.

UNITED KINGDOM MONEY TARGET POLICY 1
UNITED KINGDOM MONEY TARGET POLICY
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Executive Summary
This essay evaluates the United Kingdom money target policy or rather the monetary policy from
the period 2016 to 2018. It shows the trend of inflation and interest rates over this period and
suggests what should be done by the government to foster economic growth. United Kingdom is
among the richest nations with free economies not only in the Europe Region but also in the
whole world. Its economic prosperity is as a result of keen formulation of macroeconomic
policies like the monetary policy among others. The central bank of the United Kingdom uses
two main tools of monetary policy which include interest rates and the quantity easing
(McCallum 2018, p.72). Inflation has been high in the United Kingdom and hence consumer
purchasing power has decreased over time. This has made interest rates to rise in order to counter
it. The United Kingdom monetary policy has been successful but still a lot needs to be done. The
government has planned to lower interest rates to 2.0 percent which is relatively lower and stable
in order to foster economic growth.
Introduction
United Kingdom is among the richest nations not only in the Europe Region but also in the
whole world. According to the 2018 Index Ranking, United Kingdom is among the top eight
countries in the Europe region with most free economies with a score of economic freedom
above 77.0. According to economic growth which is measured by the use of gross domestic
product, United Kingdom is ranked among the top countries in the Europe region and its
economic growth score is above the expected world and the regional averages (Barro 2017,
p.221). The superb economic growth results of United Kingdom have been contributed by its

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keen manipulation of the key economic growth policies which include the monetary policy
among others.
Monetary policy is one of the macroeconomic policies used by the central bank of every nation
to control their economic growth. It involves the manipulation of a nation’s prevailing interest
rates to influence the amount of money circulating in the economy hence controlling the level of
inflation in the economy (Hamburger 2018, p.25). The United Kingdom central bank uses two
main tools of monetary policy which include interest rates and quantity easing or asset purchase.
The central bank of United Kingdom sets interest rates at which the other banks in the economy
borrow money from it. These are called official bank rates. The central bank can also buy or sell
government depending on its economic aim. This is the quantity easing or the asset purchase.
The United Kingdom monetary policy from the year 2016 to 2017 has been discussed below.
Money inflation
Generally inflation is a reflection of the rate at which the general price of goods and services in a
given country rise considering a given period of time. It’s actually more of comparing the cost of
goods and services today with the cost of similar goods and services for the previous year. The
government of the United Kingdom has set an inflation rate of 2.0 percent. This is actually a
considerable inflation rate which is low and stable and assists the entire economy in planning the
future plans with greater certainty. A higher rate of inflation which keeps on changing over time
makes it difficult for business organizations to set the commodities prices and consumers to
budget their daily spending (Kontonikas 2016, p.525). Considering the period 2016 to 2018, the
United Kingdom inflation rates have been rising having been higher during the year 2017. This
has actually seen the price of commodities rise over this period and for now the 2018 price of

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commodities is 5.87 percent higher than that of 2016. This means that consumer’s purchasing
power has decreased during this period and as a result £105.87 currently is equal to £100 in
2016. The values have been tabulated below:
Year Inflation Rate (%)
2016 1.70
2017 3.59
2018 2.20
The graph for the tabulated values is shown below:
2016 2017 2018
0.00%
1.00%
2.00%
3.00%
4.00%
United Kingdom Inflation Rate for 2016 to
2018
Inflation Rate
Year
Inflation Rate
The graph above shows that the United Kingdom inflation rate has risen from the year 2016 with
the highest value being 2017. From the graph, it is evident that the government of the United
Kingdom through its central bank has undertaken measures to lower the inflation rate as it has
decreased from the year 2017 to 2018. These measures among others include the increase in
interest rates.
Supply Interest Rates

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Interest rates refer to charges involved in borrowing of money. It is the amount paid by the
borrowers to lenders for the use of their money and also what banks pay their customers for
saving their money with them (Ang and Bekaert 2017, p.163). The central bank of United
Kingdom usually sets bank rates at which it lends its money to other banks. The set bank rate
usually affects the overall interest rates charged by banks in the country. Currently the United
Kingdom bank rate has been raised to 0.75%. This means that the overall interest rates in the
country will have to rise. This has resulted due to the rising inflation in the country which needs
to be addressed as soon as possible. The following are the interest rates from the period 2016 to
2018:
Year Interest Rate (%)
2016 0.50
2017 0.30
2018 0.75
From the table above, it is clear that the interest rates declined from 2016 to 2017 and later on
increased by the year 2018. The graph for the data is shown below:

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2016 2017 2018
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
United Kingdom Interest Rates for the period 2016 to 2018
Interest Rate
Year
Interest Rates
From the graph, it is clear that interest rates have increased due to the rise in the bank rate by the
central bank. This has been the case in an attempt to lower the rising inflation rate in United
Kingdom.
Based on the above data for inflation and interest rates, the monetary policy of United Kingdom
should be reformed. The interest rates have been rising from the year 2017 up-to-date. This has
lowered investment in the economy in as much as the government is trying to address the issue
of the rising inflation. The government of United Kingdom plans to lower the interest rates to
2.0% in future which is relatively stable and low (Allsopp, Kara and Nelson 2016, p.232).
Conclusion
United Kingdom is among the top four richest nations in the Europe Region and among the top
eight nations in the region in terms of economic freedom with a score of more than 77.0. It uses
macroeconomic policies which include the monetary policy among others. The central bank of
United Kingdom majorly uses two main tools of monetary policy which include interest rates

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and quantity easing. Inflation in United Kingdom has been rising currently and this has made
interest rates increase to counter it. The government of United Kingdom plans to lower interest
rates to 2.0 percent which is stable and relatively low in order to encourage economic growth
alongside reducing inflation rates.
References
Allsopp, C., Kara, A. and Nelson, E., 2016. United Kingdom inflation targeting and the
exchange rate. The Economic Journal, 116(512), pp.F232-F244.
Ang, A. and Bekaert, G., 2017. Regime switches in interest rates. Journal of Business &
Economic Statistics, 20(2), pp.163-182.
Barro, R.J., 2017. Government spending, interest rates, prices, and budget deficits in the United
Kingdom. Journal of monetary economics, 20(2), pp.221-247.
Hamburger, M.J., 2018. The demand for money in an open economy: Germany and the United
Kingdom. Journal of Monetary Economics, 3(1), pp.25-40.
Kontonikas, A., 2016. Inflation and inflation uncertainty in the United Kingdom, evidence from
GARCH modelling. Economic modelling, 21(3), pp.525-543.
McCallum, C., 2018. Monetary theory and policy. MONEY, 51, p.72.