1. CISI – Financial Products, Markets & Services
Topic – The economic environment
(2.1.2, 2.1.3) Central Banks/Monetary Policy Committee

2. Monetary or Fiscal Policy?
Increase the personal tax allowance
Decrease the base rate of interest
Monetary
Policy
Issue more notes and coins
Increase the base rate of interest
Increase the rate of VAT
Re-introduce the 50p rate of tax
Increase spending on the NHS
Fiscal
Policy
Decrease spending on education
Inject money into the economy – quantitative easing

3. Monetary Policy Fiscal Policy
Monetary and Fiscal Policy
Adjusting interest rates (to control inflation) and the money supply to manage fluctuations in economic activity. Monetary policy is often the responsibility of a country’s Central Bank.
Monetary
Policy
Governments attempt to manage fluctuations in economic activity through taxation and expenditure. These measures are known as stabilisation policies categorised as fiscal policy.
Fiscal
Policy

4. Retail Banks Investment Banks Central Banks
Activities:
Activities:
Activities:
Provides credit cards for customers
Advise businesses wanting to borrow money in bond markets (debt)
Provides a depositors’ protection scheme
Provides personal loans for customers
Issues notes and coins
Advise businesses wanting to issue shares (equity)
Acts as a banker to the banking system i.e. Commercial banks
Currency exchange for people travelling
Advise businesses on strategy and growth (Mergers and acquisitions)
Acts as a banker to the government
Mortgage lending for people to buy homes
Regulates the domestic banking system
Advise businesses on strategy and growth (Mergers and acquisitions)
Provides savings and current accounts for individuals
Holds the nation’s gold and money supply
Buy and sell financial assets to make a profit
Influences the value of a nation’s currency
Arranges overdraft facilities for customer accounts
Sets the official short-term rate of interest (base or bank rate)
Manages the national debt
Controls the money supply

5. Central Banks – The Bank of England (BoE)
Background
UK Central Bank – Threadneedle Street, London
Founded in 1694
Since 1694 – banker to the government
Since the late 18th Century – banker to the banking system
Manages the UK foreign exchange and gold reserves
It does NOT :
manage the National Debt (This is the Debt Management Office in the UK)
provide a depositors protection scheme (This is the Financial Service Compensation Scheme in the UK)

6. Central Banks – The Bank of England
Strategic Priorities
Monetary Policy Committee
The MPC’s main focus is to meet the inflation target set by the Chancellor each year.
The MPC holds monthly meetings
Gauges all factors that influences inflation:
Exchange rates
Rate of economic growth
Consumer borrowing and spending
Wage inflation
the MPC makes a decision about whether to raise or lower the ‘base rate’ of interest based on the factors above.
Financial Policy Committee
Established in June 2011 as a response to the 2007/8 financial crisis.
Monitors the stability and resilience of the UK financial system and its powers to tackle risks.
It gives direction and recommendations to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

7. Central Banks – Alternative instruments
What happens if interest rates can no longer be lowered?
Interest rates cannot fall below 0%
During the recent recession, interest rates were reduced massively by central banks in developed countries.
When interest rates cannot be lowered any further, central banks must use alternatives.
Quantitative Easing as an alternative instrument
1. BoE injects money into the economy
2. BoE uses this money to buy assets such as government and corporate bonds. This increases the amount of money the government and private sector institutions have.
Banks hold more reserves which might mean they lend more to consumers and businesses.
Outcomes of QE
Private sector institutions and government have more money to spend as a result.
Private sector institutions and government may buy other assets so prices are boosted and liquidity is improved – people feel better off so spend more.
Buying assets means higher demand and therefore higher asset prices and lower yields – brings down the cost of borrowing for businesses, and households, encouraging further spending.

8. Central Banks – The Federal Reserve (FED)
FOMC Chairman
Appointed by the US President
7 members appointed by the US President
7 members of the Board of Governors
Acts as lender of last resort to US banking system
This can help stop ‘Contagion’
The Fed (1913)
FEDERAL OPEN MARKET COMMITTEE (FOMC)
Promotes price stability and economic growth
Meets every 6-weeks – economic health?
Should the Fed funds rate be altered? Emergency session required?
2015 – Fed raises interest rates for the first time since the 2008 Financial Crisis
Each of the 12 banks monitors the activities and provides liquidity to the regional banks they are responsible for
5 Presidents from the 12 Federal Reserve Banks
12 Federal Reserve Banks
Regional Banks in the USA

9. ECB SETS THE MONETARY POLICY FOR THE EUROZONE:
Central Banks – European Central Bank (ECB)
ECB SETS THE MONETARY POLICY FOR THE EUROZONE:
Maintain internal price stability
Keep Harmonised Index of Consumer Prices (HICP) ‘close to but below 2% in the medium term’.
Influences external value of the euro and growth in the money supply.
The Single Supervisory Mechanism (SSM) framework was established. The ECB and national supervisory authorities supervises and monitors the financial stability of banks in the Eurozone – a milestone towards banking union within the EU
Frankfurt, Germany
Established when the Euro was created
ECB ( )
ECB President and Council
Council comprises of the governors of each of the eurozone’s national central banks
EUROZONE
COUNTRIES
The ECB was NOT a lender of last resort
UNTIL: The Eurozone Crisis ( ) Several eurozone countries had to be bailed out (Greece in particular)