In the UK, interest rates are set by the Monetary Policy Committee (MPC), a group of nine central bankers who meet eight times a year to decide on any changes to the official interest rate. The main objective of the Committee is to use the interest rate as the main tool in keeping inflation under control, and as close as possible to their target of 2%.
With the UK economy struggling in 2019, only narrowly avoiding a recession after 0.3% growth in the third quarter, the MPC is considering reducing the official interest rate in an attempt to stimulate aggregate demand and build some positive momentum in the UK economy.
Currently 0.75%, the cut will likely reduce the interest rate to 0.5%, a return to the July 2018 value when the economy was somewhat more stable after six months of continued positive economic growth.
Think like an Economist!
Q1. What is meant by the term monetary policy?
Q2. Explain one negative impact of high inflation.
Q3. Explain one reason why lowering the interest rate will stimulate AD in the UK
Q4. Assess the impact that lowering the interest rate will have on the UK economy.
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