In an attempt to combat the economic fallout caused by the outbreak of the coronavirus, the Bank of England has taken the extreme measure of cutting interest rates from 0.75% to 0.25%.
Monetary policy of this kind is a key tool in times of economic crisis, and the UK government will be hoping that this move will sufficiently stimulate aggregate demand by encouraging both consumers and firms to borrow more, driving up both consumption and investment throughout the economy.
In addition to the interest rate cut, the Monetary Policy Committee (MPC) has also announced that the new rate will be offered to banks for four years of funding, and their reserve requirement ratio will be relaxed. This will potentially free up billions of pounds which can now be loaned out.
The emergency move has been made at a time of deep uncertainty and economic instability with no-one knowing how long the coronavirus will continue to affect both the domestic and global economy. It is hoped that the decision will help firms to stay in business and keep people in their jobs whilst we wait for this storm to pass.
Historically low interest rates in the UK!
source: tradingeconomics.com
THINK LIKE AN ECONOMIST!
Q1. What is meant by the term monetary policy?
Q2. Explain why a decrease in the interest rate will help firms to stay in business.
Q3. Evaluate the extent to which monetary policy can be effective in stimulating aggregate demand.
Click here for the source article
