Monetary Policy

The monetary policy refers to the policy that is used to control the supply or the cost of money. Essentially it changes the interest rates and changing quantitative easing. The monetary policy has a large effect on inflation.

·         Controlling Inflation:

1.       Most house purchases are financed by mortgages. Interest payments on this are paid monthly depending on interest rates. Higher monthly payments means less money for consumption hence inflation goes down.

2.       Many high value purchases e.g. cars and houses are financed on credit. Higher interest rates mean fewer people will consume and so inflation goes down.

3.       Higher interest rates, encourage saving due to eh higher interest on savings. Obviously, this leads to less spending in the economy.

4.       Since 1997, the Bank of England has been instructed to set interest rates each month to keep UK inflation and stable at around 2%.