Major economies in the world alongside the UK economy are in a period of recession. A number of factors have led to this downturn in the economies, all linked to global financial crisis. The interference to bank lending has reduced access to credit facilities of all sorts and this in turn has an impact on the property and housing market as well as on construction. The decline in lending has also affected investment levels and consumer spending. All governments want to achieve economic stability. In achieving this aim, the following major macroeconomic objectives are pursued, price stability, full employment, sustained economic growth, stable exchange rate, stability in trade balance of payments with other countries and environmental protection (Myers, Danny 2004). In an attempt to achieve these macroeconomic objectives, to limit the effects of the recession on investment levels and maintain the activity level of the economies, many governments have employed the use policy instrument in the form of monetary and fiscal policies to bring the economy towards an ideal state of balance.

Monetary policies involves the use of interest rates and other monetary tools in an attempt to manage macro economic variables such as inflation, the level of consumer spending, consumer confidence, exchange rate index, economic growth and unemployment in an economy. Recession is a result of widespread downturn in economic activity and the government could react by the use of expansionary monetary policy which involves reducing banks’ reserve requirements, by lowering interest rates to increase money supply and boost economic growth. This policy could also be applied contractionary, to control the rise in demand by increasing the interest rates thus reducing the supply of real money in the economy. This plays a great role in controlling inflation (Economy watch).

In the UK, monetary policy is being controlled by the bank of England which has independence in setting interest rates. The objectives of the UK government in the recession have been to reduce inflation, reduce unemployment, influence consumer spending and build a strong economic growth.