1. Low Interest Rates and the UK Economy AS Macro – Spring 2014

5. Limits to the Effects of A Cut in Nominal Interest Rates Commercial banks reluctant / unable to lend Low Business & Consumer Confidence Falling real incomes for savers High stock of personal debt Some interest rates have actually risen

6. Some of the Recent Changes to UK Monetary Policy There have been a number of important changes in the handling of monetary policy by the Bank of England in recent years Quantitative Easing (QE) 2009 – buying bonds to increase deposits and lending by the banking industry Project Merlin (2011) - agreement between banks & Government to increase lending to small/medium-sized businesses Funding for Lending Scheme (2012) – joint policy between Treasury and the BoE which provides cheaper funding to banks that increase their loans to households and businesses Forward Guidance (2013-14) - under forward guidance, the Bank’s policy rate will remain at 0.5% at least until unemployment falls to 7% or until there are clear signs that the amount of spare capacity in the economy has reached normal levels

7. Evaluation Points on Interest Rates & Monetary Policy Time lags should be considered when analyzing effects of interest rate changes Monetary policy not an exact science – consumers and businesses don’t always behave in a textbook way! Many factors affect costs and prices which can change inflation risks in a country Monetary policy does not work in isolation! Consider how fiscal policy is affecting the economy Objectives of monetary policy can change – the USA Federal Reserve’s mandate is “maximum employment, stable prices, and moderate long-term interest rates”