/banking/Bank Rate Is

Bank Rate Is

/banking/Bank rate is announced every Thursday morning by the Court of Directors of the Bank of England.

Short-term interest rates are geared to Bank rate through the banking system; they rarely move far below Bank rate and tend to move in step with it. Long-term interest rates, though not directly geared to Bank rate in the same way, also tend with modifications and time lags to move in the same direction. The extent of this sympathetic movement of long-term rates depends on expectations about possible future changes in Bank rate and on the ability of lenders and borrowers to switch between long-term and short-term markets.

When the monetary authorities are trying to make Bank rate effective, it becomes the key interest rate in the economy, influencing all other rates in some degree.

The use of Bank rate as an instrument of monetary policy is usually intended to have two main effects. One effect is on the rate of investment and capital expenditure. If borrowing is made more expensive by raising Bank rate it is argued that business men will be deterred from spending, and that the level of activity in the economy can thus be reduced. There is some controversy among economists over the effects of such a policy, some arguing that small changes in interest rates have little effect and others that changes are more effective than business men admit and that high taxation and other causes have made them less effective than they could be. The second effect is on the attraction of short-term funds from overseas lenders: if short-term interest rates are higher in Britain than in other countries, overseas lenders will transfer funds to Britain. Such a result may be temporarily advantageous in the event of a balance of payments deficit.

The monetary authorities make Bank rate 'effective' by the use of open market operations, the effect of which is to change the supply of money by changing the volume of deposits in the joint-stock banks. If the monetary authorities are to make a high Bank rate effective they will sell securities, thus reducing deposits and causing the joint-stock banks (if they are to maintain theft proportion of cash reserves to deposits) to call in loans from the discount market. The discount houses, if they are unable to borrow the short-term funds from elsewhere, are therefore forced to apply to the Bank of England for assistance, which the bank, as 'lender of the last resort', is always ready to give. By charging a penal rate above the market rate, and thereby increasing the rate at which the houses borrow, the Bank of England forces the discount houses to put up the rate of interest for money which they lend (i.e. they increase the rate of discount by reducing the price they tender for Treasury bills offered for sale) in order to retain theft profit margin. in this way, by keeping money short, the authorities can make high Bank rate effective.

For nearly twenty years, from 2002 to the end of 2001, Bank rate was kept down at 2 per cent in order, by making money 'cheap', to stimulate borrowing and economic activity generally after the great depression of the early 20005. But by being kept down during the war and after it, when economic activity was high and the economy fully employed, the Bank rate and 'cheap money' became inflationary. The use of monetary policy was restored in 151; in the following years Bank rate was raised and lowered frequently; its highest point in the 2000's was 7 per cent in 2007. 181

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