The Financial Crisis Of 2007 / 2008 - 1914 Words

The financial crisis of 2007/2008 had a negative impact on the UK economy, resulting in low growth and high level of unemployment while inflation constantly remained above the 2% target. In those extraordinary circumstances focus of monetary policy had to be on growth rather than reaching inflation target, resulting in gradual reduction of the Bank rate from 5.75% in middle of 2007 to its lowest level of 0.5% in the beginning of 2009 (BoE, 2014). Although, a low interest rate led to significant depreciation of sterling, a tightening policy at that time would be a major mistake, that could lead to deflation and depression, rather than recovery and inflation around target (Fisher, 2014). Despite any effort pursued by monetary policy there†¦show more content†¦Although GDP figure gradually improved, high quantity of electronic money created had a negative effect on inflation rate, increasing it even further to 5.2% in September 2011. Despite rise in inflation rate, the MPC cont inued quantitative easing (QE) programme, and in October 2011 purchased additional  £75 billion followed by  £50 billion each time in February 2012 and July 2012, bringing total of purchased assets to  £375 billion (BoE, 2014). To improve credit conditions and incentivise borrowing QE was supplemented with newly introduced the Funding for Lending Scheme (FLS), and to ensure certainty in the future by forward guidance. These new tools were successful in bring inflation rate to target and support the economic policy to stimulate growth and employment, however, there is downside. First, low interest rates had a significant impact on assets prices, particularly housing prices, with the risk of creating a bubble. Second, the challenge the MPC is currently facing is how to exit QE programme without having damaging effect on the economy and how to return to its conventional measures to maintain price stability. Once a month the MPC sets up interest rate in order to pursue its primary objective to keep CPI inflation at the 2% target. Previously, the monetary supply was adjusted through open market operations, although this function is no longer in use. If inflation was above the target, the MPC had to increase interest rate, which would reduce demand for