FINANCIAL STABILITY

Financial and Monetary Stability



Table of Content

INTRODUCTION2

DISCUSSION3

Monetary & Financial Stability3

Capital Adequacy4

Basel 35

Bank of England low interest rate policy7

Impact of increase in interest rates8

CONCLUSION10

REFERENCES10

Financial and Monetary Stability

Introduction

Monetary policy in England is set by the Bank of England. The man aim of the monetary policy is to strive towards achieving a low & stable inflation while coming up with an appropriate rate of interest. For coming up with this rate the monetary policy committee holds monthly meetings for achieving this target. A low & stable inflation and to achieve a low level of interest rates require a trade of. Normally a high level of interest rates is attributed to bringing the inflation level down. This is because as the interest rates are high, people will save more and there will be less circulation of money which will keep inflation in check appropriately.

For Banks to perform sufficiently, they must maintain good liquidity. This would ensure that Banks will be able to meet its financial obligations; Basel 3 introduces more stringent measures to increase the requirements for capital adequacy ratios. This is implemented on a global scale to create a better financial system. After the global financial crisis, people have lost confidence in the financial system which means that they are more reluctant now to invest.

Tightening up of credit has also meant that the level of economic activity has gone down. The main aim of the monetary policy is to ensure the right balance between inflation and interest rates to strive for a sustainable progress. The supply of money should be kept track of; increase in reserve requirements for Banks would mean tightening up of credit. Rising interest rates would mean, people will have higher cost of debt and will prefer to save more than to invest in business.

The Bank of England has been successful in bringing down inflation, yet they have not been able to stimulate the economy which has been questionable. If the economy of England is to be restored to previous high levels of growth, then interest rates should be brought down and government policies should support businesses.

Discussion

Monetary & Financial Stability

There exist a great debate as per whether a trade off exist between financial and monetary stability. Central Bank has been amused by this phenomenon for now many years. Monetary stability refers to the price stability. When one talks about price stability, they are referring to a low level of inflation. Inflation affects the households and corporate directly, a high price level will means that individuals will have to pay more for the same amount of goods that they were purchasing for lower amount of money. Measuring the price level has some issues associated, yet it's not that hard to understand. ECB defines price stability to be a change in price level below the level of 2 percent on a year to year basis. The index used to measure the price level in EU is the Harmonized index of consumer prices (Williamson, ...