As MPC’s official meeting is held in every August, Committee noted that high tensions from euro area, weak output growth and huge fall in inflation, causing huge possibility to fall below targeted level lesser than 2.4%. Several factors could be taken into account to affect the inflation level in the future, such as, pace of demand recovery associated with supply movements, spare capacity weighs on costs and prices, change in exchange rate and path of commodity prices. There are several judgements made by the Committee regarding on the inflation levels such as projections on rise of GDP in 4th quarter of 2012 despite it has fallen over the first half of 2012; assumptions on adjustments made by euro area affecting UK economy while growth in euro area is likely to remain weak; weak productivity growth due to lack of sufficient funds for companies; and positive impact from the launched of FLS and expansion in asset purchase programme that could bring into the economy. One of the best judgements is that MPC assumed GDP growth and inflation would increase by having the Bank Rate of 0.5%. The MPC focuses on several economy growth indicators such as developments in the world economy, mainly the euro –area, change in exchange rate, impact of introduction of FLS to credit conditions and real economy ,evolution of primary productivity growth, and effects of rise in MPC asset purchases, from £325billion to £375billion. Moving on to judgements on inflation, Committee further the focus on indicators of commodity prices, degree of spare capacity in the economy, and evolution of companies’ labour costs and prices. Actions had been taken by MPC to bring back the economy on the right track. Firstly, the Funding Lending Scheme (FLS) could loosen the problem of tight credit condition. As bank funding costs was much higher even before the crisis, balance sheet has to been repaired due to the sharp fall in lending to private sector. FLS made ways for banks to obtain funds on preferential terms at below market rates, boost the growth of demand and pass the positive effect to households and funds needed in business. Second, expansion of MPC asset purchase programme from 325 billion to 375 billion. Further support on consumption also comes from a recovery in real income growth while saving ratio declines a little as rise income comes to rise in consumer confidence. Money and asset prices
International asset price has been volatile since the time of May Report, while credit conditions in UK continued to tone down, going along with MPC’s judgement. Fluctuations in asset prices are largely driven by credit conditions and trivial improvement of economic conditions.
Credit conditions could be affected by size and composition of bank’s balance sheet, hence influencing the incentives of lending. Before the launched of FLS, certain banks had raised further the rates and credit conditions had continued to tighten. Creation of FLS helps to ease credit conditions by providing banks with a cheaper source of funding and encourage people to lend more at lower rates. As a result of lower rates- below market rates of 0.5%, asset prices increased. For example, equity bond and increased, resulted a rise in wealth, leading people to spend more.
Besides that, MPC expands the size of its asset purchase programme to £375 billion, which expected to be completed in November. Asset purchase programme initially raises investors’ money holdings when they sell gilts to the Bank. Overtime, investors reinvest the proceeds from those gilt sales, boosting the price of other assets, such as equities and corporate bonds. This results in fall in borrowing costs for companies and boost nominal spending. Survey evidence suggests that credit conditions faced by businesses have continued to improve since the May Report. It is said that net lending expected to pick up as demand for bank credit among large companies rise, which causing inflation going...
References: Bank of England (2012) Inflation Report: August 2012 [online]. Available from: http://www.bankofengland.co.uk/publications/Pages/inflationreport/ir1203.aspx [Accessed 11 November 2013]
Bank of England (2013) Inflation Report: August 2013 [online]. Available from: http://www.bankofengland.co.uk/publications/Pages/inflatinoreport/ir1303.aspx [Accessed 16 November 2013]
Economywatch.com. 2013. UK Exports, Imports and Trade | Economy Watch. [online] Available at: http://www.economywatch.com/world_economy/united-kingdom/export-import.html [Accessed: 21 Nov 2013].
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