Before 1997, interest rates in the UK were decided by the government and were sometimes used for political rather than economic reasons. In 1997, New Labour gave control over monetary policy to the independent Bank of England, with the Monetary Policy Committee setting interest rates to meet an inflation target. The MPC considers factors like financial markets, the international economy, money and credit conditions, demand and output, the labor market, and costs and prices when deciding interest rates.

1. Aquinas College Economics Department
Monetary Policy in the UK
MPC & The Bank of England
ECON4

2. Aquinas College Economics Department
Pre 1997
Interest rates in the UK would be decided
on by Government
Often they were used for political purposes
rather than economic ones
Thatcher and Lawson were accused of doing this in 1987

3. Aquinas College Economics Department
Post 1997
New Labour gave operation independence
to the Bank of England
The Monetary Policy Committee now sets
the Interest Rate
Gordon Brown announced the policy soon after they were elected

4. Aquinas College Economics Department
The MPC
The MPC will set an inflation target that
they need to meet
Should the rate of inflation be greater than
1% either way the Governor of the Bank of
England must explain why to the Chancellor

5. Aquinas College Economics Department
What do they consider?
Financial Markets
–Includes share prices
International Economy
–US, Eurozone, China are key indicators
Money & Credit
–Bank lending figures are analysed
Demand & Output
–Consumption and planned investment
Labour Market
–Figures for employment & unemployment
Costs & Prices
–Look at costs to business

6. Aquinas College Economics Department
UK Interest Rates