Introduction

In connection with the economic crisis of 2008/2009, the Bank of England tried to improve all economic indicators and boost the economy using regulations. Recent monetary policy is under discussion because of its influence on economic indicators and the change in forward guidance, which was implemented by central bank of the UK. In this assignment I will consider what people expect the changes of the policy to be. Moreover, I will be explaining how the policy will affect economic indicators such as interest rate, investment, income and market price. This assignment will cover quantitative easing policy and how it will work with forward guidance policy.

Main body

Forward guidance policy

Explicit forward guidance is a tool of monetary policy which tries to eliminate uncertainty about the future path of the interest rate of the central bank for financial market participants, households and firms. It is simply a promise concerning future interest rates. Nowadays, Bank Rate is set at the level of 0.5 percent by the Bank of England (Bank of England, 2014). For the first time, Bank’s forward guidance policy was introduced by Monetary Policy Committee, which is led by governor of the Bank of England, Mark Carney, on 7 August 2013. The first version of this policy consisted of not raising the interest rate of 0.5% until level of unemployment will be 7% or less (Bank of England, 2013). In that time, unemployment rate made up 7.8 percent which was below than objective of the central bank (ONS, 2013).

Despite the aforesaid, the unemployment rate suddenly began to drop down and reached 7.2 percent in 19 February 2014 (ONS, 2014). The unemployment rate had been decreasing by 0.6 percent for 6 months. This change could lead to discouraged investors because of their expectations about soon rising of bank rate. It could lead to increasing saving instead of investments. Thus, if Bank of England would decide to decrease money supply in order to increase the interest rate, the money demand would decrease since people would not spend money preferring to save them. Hence, the interest rate would stay the same. Therefore, the policy has undergone some significant changes after 6 months, on 12 February 2014. In 12 February 2014, Mark Carney stated that new additional indicators such as wages, productivity and spare capacity within the economy would be added which would give confidence for the business world in the long term at least until early 2015.