During this economic condition because of the Coronavirus outbreak, the Monetary Policy Committee of the Bank of England sets monetary policy to meet the 2% inflation target. Now, the challenge relies on the financial circumstances and disruption due to the COVID-19 outbreak.
The disease has spread so badly over the globe that WHO has declared this disease as a pandemic. People have to stay in the lockdown and hence can’t come to work. Even, people are losing their jobs. As a consequence of all these, the economy of the UK is at a greater risk. Experts are fearing long-term damages to the economy along with the severe unemployment in the country.
Recent Scenario of the UK
Till this date, the number of affected people is increasing day by day in the UK. The number of casualties is also reaching new peaks every day. People are afraid of leaving home for work. Rather they like to stay indoors. Many of them are working from home.
But the scenario is not the same for all. There are numerous people who have already lost their jobs. There are several consumer-facing companies that have to halt their workings for now.
Other businesses have to cease their entire operations for the outbreak. The investments are getting postponed and the exporting companies are near to a great loss. These are definitely weakening the entire financial system of the UK. In the near future, unemployment would be a great issue.
Experts are expecting GDP to fall sharply this year. Social distancing is also affecting business means. From daily necessity shops to the aviation industry, the decline is visible to all. There is a huge change in financial market prices. All the risky asset prices have dropped suddenly. Additionally, people are leading their lives with huge amounts of debt.
As an overview of the entire scenario, we can conclude that the economy might degrade to a great extent. All the major banks are setting up their monetary policies so that they can tolerate this situation. This would also help in stabilising the market.
What is Monetary Policy?
Before leaping to the role of monetary policy and its summary, it is important to get a concept about monetary policy. Monetary Policy is an act or series of acts that are decided by the government or central banks of that particular country. The aim of the policy is to decide how much money it costs to borrow. It also decides how much money is left in the economy of the country.
The Bank of England has decided to set the monetary policy at 2% of the inflation rate. The rate of inflation means how much costs are rising in any period of crisis. The Bank has decided to keep the inflation rate as low as it can be. It would help you to maintain the overall economic growth of the country. Additionally, the monetary policy is going to ease the issue of unemployment, too.
Role of the Public Policy
The Public policy comprises all the front-liners who are dealing with the COVID-19 affected people directly. The list includes NHS health professionals, volunteers, carers all across the UK. The front liners are trying their best to get rid of the pandemic disease as soon as possible.
In this crisis, monetary policy should take responsibility for public policy. The duty of the monetary policy is to minimize the effect of COVID-19 so that people do not suffer due to long-term damage to the economy.
The instance can deteriorate without financial stability. The Bank of England has taken all kinds of preventive measures to ensure that the economy keeps itself consistent. The Bank of England is collaborating with the government of the UK to take all possible initiatives that would bring complementary changes to the financial condition. Thus, it can support the households and moreover the disruption of business efforts.
Whereas the government of the UK has announced some fiscal support measures; the Bank of England has also supported the businesses in the UK. Furthermore, the Financial Policy Committee has decreased the countercyclical capital buffer rate to 0%.
The committee announced this decision on 9 March 2020. The FPC is collaboratively working with the Prudential Regulation Committee. Both these committees are closely monitoring the response of the Banks to their current measures. They are also checking out the consequences faced by households and businesses due to these measures.
HM Treasury has announced the formation of the COVID Corporate Financing Facility. It would provide funding to those businesses willing to purchase commercial papers. This will act as an alternative to financial opportunities.
The Role of Monetary Policy
The monetary policy is going to maintain a 2% inflation rate in order to maintain pricing stability. Particularly, we are talking about the Consumer Prices Index or CPI. And, in February, the CPI was 1.7%. The CPI should have declined if the COVID-19 didn’t come out. The monetary policy needs to act accordingly so that the overall financial growth doesn’t decline, rapidly.
The target is 2.0%. So, it is really challenging to maintain all the financial aspects at the same time. The damage to the economy can be sudden and of short duration but many people would be jobless. Businesses have to struggle against inflation. The role of monetary policy is to handle all these financial pressures.
Monetary Policy Summary
First of all, after several meetings the Monetary Policy Committee of the Bank of England has decided to reduce the bank rate by 65 basis points. The committee members have taken some more important decisions at this current situation.
- The bank rate can deviate from 0.75 to 0.1%.
- Stock assets purchased are allowed from £200 billion to £645 billion from the central bank reserves.
- Sterling non-financial corporate bonds can be purchased, as well.
The Monetary Policy Committee will monitor all the banks and building societies so that the bank rate should be within 0.1%. The committee will continue monitoring until everything gets stable.