The Bank of England’s statutory monetary policy objectives: a historical and legal account

Michael Salib and Mesha Ghazaleh

The Bank’s monetary policy objectives are some of the most significant objectives bestowed by Parliament on any UK public authority. They are to maintain price stability and, subject to that, support the Government’s economic policy, including its objectives for growth and employment. In our paper we offer a historical and legal account of the Bank’s monetary policy objectives by looking at their origins, the parliamentary debates around their wording and their interpretation in practice. Since being introduced in 1998, our paper finds that they have proved remarkably resilient in directing the Bank’s monetary response over the past 25 years, partly due to the in-built flexibility in their wording.

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Stable gilts and stable prices: assessing the Bank of England’s response to the LDI crisis

Nicolò Bandera and Jacob Stevens

How should the central bank conduct asset purchases to restore market functioning without causing higher inflation? The Bank of England was faced with this question during the 2022 gilt crisis, when it undertook gilt purchases on financial stability grounds while inflation was above 10%. These financial stability asset purchases could have counteracted the monetary policy stance by easing financial conditions at a time when monetary policy was tightening them. Did a trade-off between price and financial stability arise? In our Staff Working Paper, we find the asset purchases stabilised gilt markets without materially affecting the monetary policy stance. This was only possible because the intervention was temporary; highly persistent asset purchases would have created tension between price and financial stability.

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Climate and monetary policy series

Boromeus Wanengkirtyo, Francesca Diluiso, Rebecca Mari, Jenny Chan, Ambrogio Cesa-Bianchi and Alex Haberis.

Climate change is becoming increasingly important for monetary policy as the world transitions into greener economies and climate change’s physical impacts become more prominent. This is complementary, but distinct to, examining how climate change affects financial stability risks (Carney (2015)). This series of posts highlights how climate change can affect key economic variables such as output and inflation, and thereby the conduct of monetary policy. Climate change and climate policies represent another set of economic shocks and structural changes to monitor, so that monetary policy can meet its objectives.

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Some implications of climate policy for monetary policy

Francesca Diluiso, Boromeus Wanengkirtyo and Jenny Chan.

This post examines key aspects of climate mitigation policies that could matter for monetary policy, using insights from structural climate macroeconomic models (Environmental Dynamic Stochastic General Equilibrium). Three main findings emerge: first, mitigation policies – like carbon pricing – can be a direct source of shocks, creating potential trade-offs for monetary policy (Carney (2017)). Second, the degree to which these policies are anticipated affects their macroeconomic impacts. Third, different climate policies may alter the transmission of conventional business-cycle shocks, therefore affecting the calibration of optimal monetary policy. We focus on the 3–5 year horizon, abstracting from longer-run considerations and changing trends such as interactions with the zero lower bound, the natural interest rate, or transitional effects on productivity and output.

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Nonbank lenders as global shock absorbers

David Elliott, Ralf Meisenzahl and José-Luis Peydró

Capital flows and credit growth are strongly correlated across countries. Macroeconomic evidence suggests that this ‘global financial cycle’ is largely driven by US monetary policy: expansionary policy by the Federal Reserve drives increases in lending globally, while contractionary Fed policy leads to a tightening of global financial conditions. Existing academic literature emphasises the role of banks in propagating these US monetary policy spillovers. But in recent decades, nonbank financial intermediaries have grown in importance. In a recent paper, we investigate the impact of US monetary policy on international dollar lending by nonbanks relative to banks, and show that nonbank lenders play an important role in absorbing US monetary policy shocks.

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High hurdles: evidence on corporate investment hurdle rates in the UK

Krishan Shah, Phil Bunn and Marko Melolinna

An important way in which monetary policy impacts the economy is through its effects on the capital expenditure of firms. When policy rates are raised (and as long as risk-premia remain unchanged) firms’ cost of capital increases. A higher cost of capital should lead firms to increase their required return (or hurdle rate) on investment, resulting in fewer projects exceeding the hurdle rate and less investment overall. For monetary policy to impact investment, changes in the cost of capital need to pass through to hurdle rates. Using new survey evidence, we find that hurdle rates for UK firms tend to be high, and they have responded sluggishly to higher interest rates over the past two years.

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State-dependent effects of UK monetary policy

Vania Esady

Monetary policy actions transmit to inflation and real activity with ‘long and variable’ lags. However, it is not obvious how the effectiveness of monetary policy varies across economic states (for instance pace of economic growth). The academic literature suggests the possibility effects of monetary policy being state dependent. For example, Tenreyro and Thwaites (2016) find that the effects of monetary policy is weaker in recessions. Many existing works are based on US data – raising the question how relevant these findings are to the UK economy, which is where this post aims to add. This work also fed into the recent Quarterly Bulletin on how monetary policy transmits.

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Central bank balance sheet policies and the market for reserves

Michael Kumhof and Mauricio Salgado-Moreno

While ‘unconventional’ balance-sheet policies like quantitative easing (QE) and quantitative tightening (QT) appear to have been successful, it is difficult to separate their macroeconomic and financial stability implications from those of other polices. Hence, in a recent paper, we develop a theoretical framework, focusing on the central bank’s liabilities, that sheds light on these implications. The key model feature is the inclusion of a detailed financial system with both heterogeneous banks and non-bank financial institutions that allows us to identify the transmission of QE/QT policies. Our framework provides guidance to policymakers interested in using new combinations of balance sheet and interest rate policies by highlighting the relevance of the interbank market and financial frictions in the transmission of balance sheet policies.

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To the lower bound and back: measuring UK monetary conditions

Natalie Burr, Julian Reynolds and Mike Joyce

Monetary policymakers have a number of tools they can use to influence monetary conditions, in order to maintain price stability. While central banks typically favour short-term policy rates as their primary instrument, when policy rates remained constrained at near-zero levels following the global financial crisis (GFC), many central banks – including the Bank of England – turned to unconventional policies to further ease monetary conditions. How can the combined effect of these policies be measured? This post presents one possible metric – a Monetary Conditions Index – that uses a data-driven approach to summarise information from a range of variables related to the conduct of UK monetary policy. We discuss what this implies about how UK monetary conditions have evolved since the GFC.

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Beyond the average: patterns in UK price data at the micro level

Lennart Brandt, Natalie Burr and Krisztian Gado

The Bank of England has a 2% annual inflation rate target in the ONS’ consumer prices index. But looking at its 700 item categories, we find that very few prices ever change by 2%. In fact, on a month-on-month basis, only about one fifth of prices change at all. Instead, we observe what economists call ‘sticky prices’: the price of an item will remain fixed for an extended amount of time and then adjust in one large step. We document the time-varying nature of stickiness by looking at the share of price changes and their distribution in the UK microdata. We find a visible discontinuity in price-setting in the first quarter of 2022, which has only partially unwound.

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