Sample Essay On Risk Regulation And Compliance

Type of paper: Essay

Topic: England, Investment, Banking, Inflation, Economics, Money, Economy, Policy

Pages: 5

Words: 1375

Published: 2020/12/17

Introduction

This paper is intended to analyze the policy regarding to bank interest rates of Bank of England as the economy of the United Kingdom has outperformed the EU economy. Taking the risk regulation under consideration the government of UK now emphasizes the option that in order to stop the runaway inflation the proper time has come for the Bank of England to increase the interest rates higher. By discussing several topics such as what UK government should do in order to convince Bank of England to raise the interest rates higher, how Bank of England should tackle the circumstances by showing evidence against on pushing the interest rates higher for the time, the effect of raising interest rates on UK economy, the impacts of interest rates have on the value of sterling and eventually the impact on the UK interest rate due to fall in energy prices and effect on inflation a proper gist of the factors has been presented here to reflect all the possibilities and the effects of raising the interest rates. Apart from that in making decisions what are the basic consideration workings behind this sort of strategy making has been thoroughly explained in this paper. The Bank of England and the Monetary Policy Committee (MPC) have their own strategies and tactics to tackle the circumstances when to take the decision of higher rate of interest for the country.

The steps UK government should follow in convincing the Bank of England to raise interest rates

As the UK economy is comprehensively outperformed the EU economy the government of UK certainly has got the idea that it is high time for Bank of England to set a higher interest in order to counter the runaway inflation. As the UK inflation fell to its record low to 0.3% in January 2015 the government can present a proposal to the Bank of England to increase its interest rates. The fear of inflation has minimized and the UK inflation is at its lowest point, therefore possibly it is the perfect time for Bank of England to increase its rate of interest. Apart from that the down in the prices of oil has opened chances greatly as the rise in inflation in current few years can be assumed to be remaining around 0.5%. So by using the circumstances if the Bank of England can increase its rates of interest the wage growth can be improved significantly as long term low inflation can possibly push down wage growth (Halligan, 2015). The falling prices of Brent crude is likely to dampen the inflation rate for a long time and as most experts believes high levels of oil output from the United States and no sign of sustainable economic improvement in the Euro zone has been noticed the commodity prices will possibly remain low in the near future which means the level of inflation can be remained in check. So no possibilities in increasing inflation can prove to be helpful to increase the rates of interest for the Bank of England which can also change consumer expectations to improve the consumer spending and wage growth. Additionally increase in rates of interest will add an extra stimulus for the market which will be greatly accepted by the public. As the economy of the UK is in well shape in compare to other Euro zone countries further interest rate cut won’t provide any volatility in the inflation percentage as several aspects are supporting in favor of rate cut by bank of England. Significantly the rise in the borrowing cost should happen sooner rather than later as longer delay will further prove to be tightening of policy which will be more painful. The UK government should back the fact of lower inflation rate as falling oil price is one of the main global reasons in order to convince Bank of England to make changes in its policy and increase its interest rates. The monetary policy committee (MPC) members have to consider the economic growth factor as the UK economic growth is rather sustainable, so lack of growth cannot be valid point in keeping the interest rates unchanged. The government of UK has to be perfectly sure that the rapid and sustainable growth factor and the low inflation should work in favor of changing the interest rates. The immediate interests of the changes in rates have to be judged perfectly by the policy makers of the country (Alemanno, 2013). The government of UK can also present the idea to raise the interest rate of the central bank of England as it can improve the value of the currency which will strengthen the economy to a great extent. The favorable circumstances can be mentioned as the high time to raise the benchmark interest rate of the country which is at its low to 0.5% since 2009. The growth in the interest rate will also bring foreign investors to the country as the higher rate of interest will affect their profit margin to a great extent and that will boost the UK economy that can be rest assured.

The argument the Bank of England should use to say to the government against to the increment of interest rates

The monetary policy committee (MPC) members of Bank of England have argued against the rate cut as many of the committee members have shown their intent quite clearly by saying that at present circumstances the committee has no intension to increase the interest rates by presenting many argument in order to support their decision making policy. Some of the policy makers have stated that low inflation is supporting their decision making by not increasing the interest rates as there is no urgency in backing the government’s suggestion. One of the policy makers of Bank of England, David Miles has stated that lower than expected inflation rate, mainly driven by the rapid drop down in oil prices globally in the recent times, suggested the monetary policy committee should be in no mood to raise the borrowing costs as well as increasing its rate of interest. The minutes of the MPC’s of Bank of England have echoed that the members of the committee have voted against the change in rate decision but given assurances in proper time the committee will act in needed to serve the people and the government. Though the possibility of deflation is point which is discussed among the members but it is not a huge worrying problem mentioned by the policy makers. If worst situation has hit then the bank will act as per necessity but in order to tackle negative inflation the public as well as the economy can be assured to be supported by the bank. Apart from that deflation can boost the disposable income of households and the debt burden will be easier to deal with (ARORA, 2011). Additionally the Bank of England has got the facility to show as European Central Bank is ready to start its quantitative easing following other countries it can be argued that the central banks have got still enough arsenal even interest rates are so close to zero. Therefore the Bank of England’s policy makers have agreed not to increase its rate of interest for now. The policy makers have also found that the low interest rates have prompted the investors to shift their liquid cash into corporate bonds which have helped to unblock the dysfunctional credit markets in previous years. So in account of these there are enough evidences to show by the Bank of England in order to defend the committee’s decision making tactics. The strong monetary policy of the bank has always proved to be helpful in the growing economy of UK and so the government should respect the decision making tactics of the central bank of England (Barrell and Kirby, 2007).

The effect of increasing interest rates on UK economy

According to the experts increasing interest rates can play a huge part in UK economy to several extents. First of all borrowers have certainly be the gainers as they have less fear from the rise in interest rates. From the historical analysis it can be seen that the smallest rise in the interest rates can have a disproportionate effect on consumers’ spending. The hike in consumers’ pending signifies high debts and mortgage repayments of those householders. If interest rates have been increased significantly then British households have to reduce their debt in a very rapid order. As far as economists have confirmed high amount of indebtedness comes from credit crunch which can lead to a prolonged downturn as people will put more effort on reducing their liabilities. Apart from that it can cause lesser spent on goods and services and people will concentrate on savings. The process is known as deleveraging. Besides rate rises will prove to be good for the borrowers as the popularity of fixed rate mortgages has been improving significantly in UK. The rise in interest rate will improve the deposit as savers will be more interested in saving their income as the interest paid on the savings will be improved (Elliott, 2014). Now in order to save the economy the savers might be a plus to the economy as savings should be net positive for consumer spending but at the same time researchers have shown that the savers who have been gained by the hike in interest rates are unlikely to spend all their earnings at once. So the consumer spending cannot be raised as expected theoretically. But most importantly the past analysis has shown UK has a wage growth problem which is a very vital aspect of UK’s economy. The rise in interest rate can misbalance the wage growth structure as the cost of an increase in interest rates of the economy heavily depends on wage growth structure. Therefore without the improvement in the income of public higher interest rates will turn people to save more and spend less that can slow down the consumer spending (Harris and Spencer, 2009). Conclusively it can stated that by rise in interest rates borrowers have lesser risks as they thought to be, while savers have got a benefit. But when the cash in the pockets of the people have to be calculated then wage growth will determine what has been really achieved by higher interest rates. The economy of UK will be certainly boosted a huge push as the higher interest can bring outer investors outside the country which can lead to the improvement in the currency market too. The market will have further liquid cash from the foreign investors that can lift the current circumstances of economy can be rest assured.

The impacts of increasing interest rates have on the value of sterling

As it has been known interest rates are determined by Monetary Policy Committee (MPC) of the Bank of England several factors are also set by the committee in order to keep the inflation rate under control set by the Chancellor. In order to discuss the impacts of increasing interest rates have on the value of sterling it is very important to understand the relation between inflation and the value of a currency. High inflation rate is a huge problem for any currency as it erodes the value of money. High inflation number suggests people will pay more and accept less. This sort of economical condition is very unpleasant for the citizens of any country and the government is always keen to check the inflation figure and keep it in a limit. UK government has always performed the same thing. Now here the duty of MPC is to maintain the interest rates at a particular level that can able to keep the inflation under check. Increase in interest rates can have its own impact on UK exports (Lokina, 2005). Foreign investors bring their cash money into the UK market to get the maximum benefit of the hike in interest rates and thus foreign currency can be converted into sterling to deposit in the banks of England. Therefore the price of the UK currency said to be pound has been driven up in the forex market. So the value of the currency is interconnected with several points which can also determined by high interest rates. apart from that as the value of sterling has been increased globally UK exports have declined as in the overseas market products become more costly as the local currency of other countries has devalued in compare to UK currency. Preferably it can be concluded hike in the interest rates can certainly improve the value of sterling to a certain strength compared to the other global currency. But several other factors are important also to determine the value of currency though mainly sterling value is improved by the virtue of high interest rates (Maio and Santa-Clara, n.d.).

The impact on the UK interest rate due to fall in energy prices and effect on inflation

In order to discuss the impact of recent collapse in oil prices all across the globe in the interest rates first of the changes which is caused by the price fall of oil has been listed. The drop down in oil prices has certainly a good news for the people of UK as people of the country has much money by virtue of drop down in the inflation rate as well that causes cheaper prices of products. The low inflation is certainly a vital result of sudden collapse in oil prices. As the inflation of UK is at its lowest and probably has a chance of negative inflation i.e. deflation there is a immense possibility for the Bank of England to raise its base interest rate from the historic low of 0.5%. But there are several factors that should be avoided by bank of England such as printing money in order to provide so called quantitative easing which can prove to be counterproductive for the economy of UK (Monaghan and Elliott, 2015). Lower inflation rate can bring tax cut among the consumers. Apart from that lower inflation rate can certainly prove to be helpful in improving the consumers’ spending as household disposable income has been boosted by the same low inflation rate. Besides, the significant low prices of energy will make it certain that in recent years the inflation figure can touch negative figure as well. Therefore the possibility is huge for the Bank of England to raise its rate of interest as wholesale energy prices in UK has also fallen sharply which led to the fall of inflation figure as well. The low inflation has also make food and commodity prices a lot cheaper than it was before. The fall of prices in energy sector also boosts the UK economy and the GDP of the country is also boosted for the same reason of low inflation rate. Improving GDP number will certainly ensure the economical growth to a larger extent. Here also several interconnected factors are associated with the impact of interest rate and inflation rate due to fall in energy prices (Patel, 2009). The collapse of energy prices has a huge impact in lowering the inflation figure of UK and it has opened opportunity to revise the strategy of Bank of England and the Policy makers and raise the interest rates in order to boost the currency and the economy. In order to decrease the rising private and public debt the Bank of England should introduce new policies as it is seemed to be the high time as the inflation rate is at the bottom and no sign of further gain in the inflation figure has been expected by the experts in upcoming years.

Conclusion

A lot of discussion has been done in this paper to look out for some of the answers which are essential to determine what the UK government and the Bank of England and its monetary policy committee should to in order to raise the interest rate when the inflation rate is all time low for the country and the fall in global energy prices has supported the fact. There are several points which should be proved to be really vital in the decision making of the policy makers (Stewart, 2015). The impact of raise in interest rate can by analyzed in more detailed way on several issues such as the value of currency or in economy of the country. Eventually it is important that both the government and central bank of England have their own set of proposals to make further progress of the economy. The policy makers and the economists have got the efficient strategies which can be relied on significantly. but the higher interest rate at this point of situation when the inflation is certainly at its lowest point will certainly boost the economy and the value of sterling can be rest assured.

References

Alemanno, A. (2013). Better business regulation in a risk society. New York, NY: Springer.
ARORA, V. (2011). Asset Value, Interest Rates and Oil Price Volatility*. Economic Record, 87, pp.45-55.
Barrell, R. and Kirby, S. (2007). Interest Rates and the UK economy. National Institute Economic Review, 202(1), pp.61-64.
Elliott, L. (2014). Bank of England policymaker: rise in interest rates 'sooner rather than later'. [online] the Guardian. Available at: http://www.theguardian.com/business/2014/may/29/interest-rates-increases-one-step-closer-after-martin-weale-speech [Accessed 12 Mar. 2015].
Halligan, L. (2015). Enjoy low inflation, but beware its side-effects. [online] Telegraph.co.uk. Available at: http://www.telegraph.co.uk/finance/comment/11352922/Enjoy-low-inflation-but-beware-its-side-effects.html [Accessed 12 Mar. 2015].
Harris, M. and Spencer, C. (2009). The Policy Choices and Reaction Functions of Bank of England MPC Members. Southern Economic Journal, 76(2), pp.482-499.
Lokina, R. (2005). Efficiency, risk and regulation compliance. Göteborg: Kompendiet.
Maio, P. and Santa-Clara, P. (n.d.). Value, Momentum, and Short-Term Interest Rates. SSRN Journal.
Monaghan, A. and Elliott, L. (2015). UK sliding towards first bout of negative inflation in 55 years. [online] the Guardian. Available at: http://www.theguardian.com/business/2015/feb/12/bank-of-england-warning-over-impending-interest-rate-rise [Accessed 12 Mar. 2015].
Patel, S. (2009). Accounting for policy change through multi-level analysis: the reform of the Bank of England in the post-war era. Policy Studies, 30(3), pp.333-346.
Stewart, H. (2015). Bank of England says no urgency in returning interest rates to normal levels. [online] the Guardian. Available at: http://www.theguardian.com/business/2015/jan/22/bank-of-england-interest-rates-decline-oil-prices [Accessed 12 Mar. 2015].

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