+1-817-968-5551
+61-488-839-671
+44-7480-542904About Expert
Key Topics
Requirement
Report format, with the table of contents, introduction, main body, recommendation conclusion.
Using, at least, one microeconomic and one macroeconomic theory please explain how low-interest rates, have affected the British economy over the last 7 years, and what we should expect from the Central Bank of England. Please include recent journals articles as reference
Solution
Executive summary
This paper attempts to study one microeconomic and one macroeconomic theory to explain how low-interest rates have affected the British economy over the last seven years and what can be expected from the Central Bank of England. The interest rate of UK has been 0.5% since 2009 which is a historically low-interest rate record till now in the country. This was done because the financial crisis was deepening at that time and there was a need to boost the consumers and maintain the confidence of businesses. It has impacted the economy on both macro and micro front. The central bank has not taken any major decision till now, but this paper has highlighted some expectations from the central bank and has recommended some solutions too.
Introduction
The interest rate of UK has been 0.5% since 2009 which is a historically low-interest rate record till now in the country (see the graph below). This is impacting various sectors of the economy like the service sector of UK recorded a sharp slowdown February 2016 (International Monetary Fund, 1988). This policy was adopted in 2009 because the financial crisis was deepening at that time and there was a need to boost the consumers and maintain the confidence of businesses. The situation was different at that time and lowering the interest rates was necessary. But, the economy of UK has moved a long way since then, and it has now entered into the seventh year of recovery. Though the ‘quantitative easing’ of seven years and low rate of interests has not benefitted the cost savers 160 billion euros (approximately) but has supported the rise in property prices, prices of stocks and bonds as well but at the same time the unemployment rate of UK is worsening for past four years, and there are other drawbacks too (International Monetary Fund, 1988).
Why stress when you can get the best economics assignment help from Allassignmenthelp.com professional experts? By following a few simple steps, you can easily access our economics assignment writing services. We have kept our order process so simple that even beginners can easily place their microeconomics assignment help orders on our website.
Impact of low-interest rate on microeconomic aspect
Microeconomics is related to the behavior of individuals and firms who take decisions regarding allocation of limited resources. When the interest rate got lowered in the UK, it became cheaper for the people to borrow money from banks. This increased the investment by the people as they spent more. The business started new projects and expanded as they could invest more. The growth of many companies occurred during this period, and their profits also increased as they benefitted from both ends- they invested more and got higher returns, and their products and services were sold in more quantities as consumers had more disposable income too. . Hence, it can be said that lower interest had a huge impact on demand and supply (Jurgilas & Zikes, n.d.). The demand of products in the economy boosted, supply rose, and investments picked up the momentum too. But the savings declined as individuals and businesses received a smaller return from saving the money. Those individuals who had to pay their mortgages, they have benefitted as lower interest rates reduced the monthly cost of repayments for mortgages, and people had more disposable income, so they increased their spending. In line with this, the buying of assets like houses, etc. became attractive for the people, and prices of houses rose, thus increased the wealth of individuals (wealth effect). Lower interest rate had a negative impact on current account of UK as the purchasing power of individuals increased, and they spent more on imported goods which worsened the current account of the country.
Due to all this, the inflation is at its peak which has eroded the value of savings as people are not saving, and they will face difficulty in the future. Households are moving towards taking loans from unsecured sources (Report: British Bankers’ Association, 2015). Individuals are taking more loans and increasing the burden of debt on themselves. The interest rates have been this much lower for seven years, and individuals and businesses have started to take this as a regular state of affairs. This will create problems for the central bank to set up a rate of interest in future for countering inflation and even a small increase in interest rates will give a big shock to people and systems of UK (Jurgilas & Zikes, n.d.).
Impact of low-interest rate on macroeconomic aspect
Macroeconomics is related to the behavior of the entire economy. It studies all the phenomenon that are economy-wide. When the interest rates fall, people borrow more money, spend more and invest more. Hence, the economy grows and increases inflation. This has happened in the UK too. Thus, it impacted the theory of inflation. Also, people here have saved less, so the value of the currency has fallen as it is demanded less. When the exchange rate fell, the exports of UK became more competitive, and the prices of imports rose. The money of the economy has gone into investments in assets and the opportunities for employment has reduced to a great extent (Ashton & Hudson, n.d.). Also, at this time companies in the UK has laid off workers that were expensive for them and had employed contractors or temporary workers in place of them. This may lead to a situation of deflation as when wages declines, people will fail to pay for the goods and services and this will create more unemployment and further reduction in wages. Thus, it has the impact on the theory of employment too. The increased interest rates have increased the investment and consumption in the UK, and hence, the aggregate demand of economy increased. So on the macro economic front, UK has suffered from inflation due to increased consumption and investments. The currency of UK has depreciated. The economy has benefitted in the way that due to increased investments, the GDP has increased (Ashton & Hudson, n.d.).
Expectations from Central Bank
The central bank is expected to increase the base rate. This will balance the demand and supply of products and services. It is the rate at which central bank lends money to other banks. When the base rate increases, the banks will automatically increase their rate of lending to public. The banks will borrow less from the central bank, and public will borrow less from banks. This is so because when the central bank lends at more interest rate to commercial banks, the commercial banks will have to pay more interest on borrowings. So they will borrow less from the central bank and will lend less to commercial banks. The commercial banks will have lesser money to give to the public and hence they will lend less, or they will start lending at higher interest rates. Hence, people will borrow less, spend less, and money flow will decline in the economy (Thompson, 1998). So the situation will be under control to some extent. The central bank is also expected to go for open market operations. It should now sell the government securities so that it can absorb the flow of money in the economy and inflation gets lowered. This will also impact the reduced interest rates to some extent.
All the sectors in the UK are worried about the EU referendum and hence they are afraid to make any new move. Since the interest rates have been low for seven years so now the policymakers of Bank of England have reassured that they will continue to borrow without any fear of the rapidly picking up inflation. The Bank of England planned to cut the rate of interest to zero. The central bank should carry out the additional purchases of assets. They should give a perspective of adjusting the policies such that the horizon of policy would shorten, and they will be able to send the inflation to the previous target.
Recommendation
The economy of UK is facing very serious situation regarding the interest rate as well as EU referendum. It can have negative consequences in the future. So the banks need to perform reasonably well now if they don't want to get trapped in the future. The central bank should now start the process of raising the interest rate slowly as a sudden increase will not be acceptable to the public too. So it should now make a target improve the situation now, and they should focus to introduce the first upward movement in April (Settlements, n.d.). The Bank in the UK should grab the opportunity to rise the rate of interest by moving behind the US as it is also increasing its interest rates. The central bank should also make an attempt to go for OMO. But in the UK all decisions are pending and prevented due to the uncertainty of EU referendum.
Place Order For A Top Grade Assignment Now
We have some amazing discount offers running for the students
Place Your OrderConclusion
It can be concluded that low-interest rates have affected the British economy over the last seven years to a great extent. Almost all sectors of the economy have observed the effects of lower interest rates on both macro and micro front. The central bank has not taken any major decision till now to control the situation as UK economy is in the confusion of EU referendum now and it is not planning to take any major decisions till then. But now it is the time for the central bank to take major decisions otherwise the situation will worsen in the UK.
References:
-
Ashton, J., & Hudson, R. Interest Rate Clustering in UK Financial Services Markets. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.938419
-
Bowen, H. (1951). THE IMPACT OF LOW INTEREST RATES ON THE ECONOMY (Discussion). The Journal Of Finance, 6(2), 264-265. http://dx.doi.org/10.1111/j.1540-6261.1951.tb04466.x
-
International Monetary Fund,. (1988). Monetary Policy Strategies. IMF Working Papers, 88(88), i. http://dx.doi.org/10.5089/9781451952575.001
-
Jurgilas, M., & Zikes, F. Implicit Intraday Interest Rate in the UK: Unsecured Overnight Money Market. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2235248
-
Policy translation through localisation: implementing national policy in the UK. (2015). Policy & Politics. http://dx.doi.org/10.1332/030557315x14298807527143
-
Settlements, B. Monetary Policy in a Changing Environment. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.1188108
-
Thompson, P. (1998). Bank lending and the environment: policies and opportunities. Intl Jnl Of Bank Marketing, 16(6), 243-252. http://dx.doi.org/10.1108/02652329810241384
Give your grades a boost
Just share your requirements and get customized solutions on time.
-
1,168,768 Orders
-
4.9/5 Overall Rating
-
5,052 Experts
