European Central Bank essay

A principle objective of any central Bank, European Central Bank and Central Bank of England inclusive, is monetary stability and this means low prices – inflation and confidence in the currency. Stable prices are defined by government’s inflation target, which the Bank seeks to meet through the decisions on interest rates taken by the monetary policy committee (MPC)-www. bangofengland. co. uk. Rising prices _ inflation reduces value of money. Monetary policy is aimed to control this occurring. Price stability is a requisite for achieving a dynamic economic goal of sustainable growth and development.

According to David Page, an economist at Investec bank(BBC news),the Bank of England is charged with keeping inflation at the rate of 2% plus or minus 1% percentage point, while the European central bank is charged with keeping the inflation at 2%. The current rate of inflation in the Eurozone and in UK, defies the MPC(monetary policy committee) of England decision and the ECB. According to Eurostat, the European Union’s Luxembourg’s based statistical office report, inflation is expected to surge to a high of 3.

5% by end of May in Eurozone and is still exp-expected to swell, this is up by 1. 5 against expected value. The rate represents the fastest pace of price increases since Eurostat started keeping records 12years ago (CNN news. com). While the UK inflation rate is hitting at 2. 5, far high than the targeted 2% rate by 0. 5% (www. timesofmalta. com). Rose Walker, in RBS financial markets, says “inflation is coming in more strongly than the market and the Bank of England have expected” (BBC News). She says “we expected a big fall but now, it turns to be a big surge”.

Though the upward swing in inflation is expected to be a short term pressure, as noted by David Sage in BBC news, the causes of inflation in the UK and the Eurozone, tend to be uncertain and beyond control. Profit margins across countries to a common external shocks, results in most differences of conformity and price inflation in countries. Profit margins may act as a buffer, cushioning the upward increases in global food prices. More so,fixed periods for the negotiation of prices between suppliers and retailers, may also delay pass through to consumers in some countries (www. finfactsireland.

com). In Germany, intense price competition among supermarkets, that has resulted in price wars which has reduced for rises to be absorbed through lower profit margins UK,clothing and footwear, provided for the upward pressure in inflation in January, this is attributed to many retailers cutting prices at Christmas time – has a temporary effect. But,in some countries,retailers profit margins don’t act as a buffer in some cases. This may be a result of food retailers operating in an environment of compressed margins. Given these conditions, input price shocks, happen to be passed on to consumers faster.

In other countries, less competition in some food segments, in the situation of robust economic activity may result in a quick pass through to consumers (www. finfactscom/ireland). However, compared to U. S Federal reserve and the European Central Bank, the ECB has an explicit inflation target and the Federal Reserve does not. The inflation target, 3% by the European Central bank, enables the institution to calculate and predict the deviations from the real value. This prediction, can be of importance to counter the forecast if possible.

But the monetary policies applied by both the ECB and the MPC draws criticism in the account they have failed to meet the exact target and the surge in consumer prices has remained on a positive swing. The institutions have failed to control the other banks, for example in the case of ECB, Banks in other countries like Latvia with inflation rate at 16%(www. finfactsireland. com) may be the cause of inflation. The interest rates should be raised to encourage savings and expenditure to lower the rate of inflation. The Banks should also discourage lending that might allow much floating cash among the populace.

Although riches won’t be controlled, especially in the case of sound increment in the crude oil prices, the institutions should have a sound energy policy to counter the problem. In summary, the UK Central Bank should be applauded for its stead control of inflation rate of 2. 5 since February, according to CNNnews. com. As compared to the case of Latvia, one of the members of the Union using Euro as their currency, the MPC deserves credit, but is below the targeted 2%. The European make should bend on the policies to influence the Central Banks in all member countries, to work on the deviations.

.PART 2 One of the Bank of England’s two core purposes is monetary stability. Monetary stability means stable prices – low inflation (www. bangofengland. co. uk) This means price control is a viable measure to experience price stability. bank reserve is a policy measure that every central Bank in every country use to influence the currency circulation that may rise to higher prices in the economy. Svein Gjeidrem, Central Bank Governor says,The primary responsibility of monetary policy is to contribute to nominal stability.

Nominal stability creates a more favourable operating environment for economic activity, and the prices of goods and services will be better conveyors of information. Consequently, changes in the distribution of income and wealth as a result of variable price inflation are avoided. Nominal stability is important to developments in the real economy, and is the most valuable contribution monetary policy can make to economic growth. Interest rates influence spending and saving in the economy and the prices we pay for goods and services. Low inflation helps to maintain a stable economy and the value of the currency(www.

bangofengland. co. uk). But interest rates cannot work alone, other monetary policies to be crafted into use to curb inflation. Like the Bank of England and other Banks, sets interest rates to keep inflation low, issues banknotes and works to maintain a stable financial system. Charles Wyplosz says”European monetary policy is inevitable not because of the completion of the internal market but because of the total liberalization of capital movements by 1 July 1990”. “EMS currencies will become subject to such instability that orderly realignments will no longer be possible”.

He says, that he only way to achieve stability will be to eliminate inflation differentials among members complete monetary harmonization. He argues that ,Research has shown capital controls are vital in preserving the reserves of currencies expected to suffer an imminent depreciation. Once controls are abolished,intra-EMS inflation differentials will lead to rapid shifts of reserves. Unless monetary policies are completely harmonized, the System will be subject to such instability that orderly realignments will no longer be possible.

The end of the EMS in its current form is therefore inevitable(www. cepr. org/pubs). The UK Central Bank and the European Central Bank, are therefore harmonization agents for the monetary union purpose. Unless monetary policies are completely harmonized, the System will be subject to such instability that orderly realignments will no longer be possible. The end of the EMS in its current form is therefore inevitable. Monetary harmonization will require a reference point to which policies can converge -UK Central Bank and the European Central Bank(www. cepr. org/pubs).

Wyplosz argues that,If central banks and treasuries act independently, they could set incompatible monetary and fiscal policies, so it seems unwise to abandon all coordination among domestic authorities. By that, the two Central Banks, act as coordinating authorities that are inevitable on the market Monetary policy as a means of controlling inflation, is more reliable across the borders as the case with the European Union. The monetary based control uses an exchange rate target is to link monetary policy and inflation in one country with that of another or others.

According to Norges Bank’s mandate, monetary policy is to be aimed at maintaining a stable krone exchange rate against European currencies, based on the range of the exchange rate maintained since the krone was floated on 10 December 1992. In the event of significant changes in the exchange rate, monetary policy instruments will be oriented with a view to returning the exchange rate over time to its initial range (Svein Gjeidrem). The guiding principle is to get both monetary policy harmonized across the borders. The interest rates are set to ensure demand in the economy is kept at a level consistent with a certain level of inflation.

This is the work of Central Bank in every country, but given the example of Eurozene where the inflation rates vary across the divide, it’s imperative to have a harmonization center of monetary policies. Conclusion In the conduct of monetary policy in different nations of a unified block of EU type, the different Central Banks of nations to harmonize under one body is vital, while independence of each should be granted to enable democratic decision making process. But monetary policy controls remains viable, even if the interest rates are set by independent banks.


Bank of England/Home,2008,viewed,31st Jan,2008<www. bankofendland. co. uk BBC news,UK inflation steady at 2. 7%,2008,viewed 18th Feb,2008<www. bbcco. uk/business. CNN. com edition,2008,’Eurozone inflation rate hits record high’ viewed 1st April,2008 <www. cnn. com/2008/WORLD/europe Finfacts team,2007,’Making business happen’,viewed Dec 14,2007,http//;www. finfacts. com/ireland/business Gausdal Svein G. (2001),’Monetary policy,the importance of credibility and confidence'<www. norges. bank. no/pages Wyploz Charles,2001 ‘Europe monetary policy'<www. cepr. org. /pubs