Monetary Policy

Monetary policy is one of the key policy instruments used to stabilise the economy, in particular, in recent years, to achieve a target inflation rate. In normal circumstances it operates through the setting of an interest rate. The Central Bank sets an interest rate – the Central Bank Policy Rate – which affects the terms on which commercial banks can borrow funds in the short term. If the Central Bank lowers its Policy Rate the commercial banks can borrow funds at a lower rate and can then in turn offer loans to their customers at lower rates. These lower rates should then encourage businesses and individuals to take out loans to finance higher spending. A higher Central Bank Policy Rate will have the reverse effect.

In response to the financial crisis many Central Banks cut their Policy Rates to unprecedentedly low levels. The Bank of England has set a rate of 0.5 for several years, and in some countries, e.g. Denmark and Sweden, these rates had become zero by 2014, and in 2016 Sweden set a negative rate of -0.1%.


Commentary – Monetary Policy

The commentary reviews the behaviour of the Central Bank Policy Rate in the UK in particular and other countries in general. It presents evidence on the effect of ‘Quantitative Easing’ on the monetary base and the failure of rises in the monetary base to produce similar rises in the broader money supply.
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1. UK Annual (1959-) Central Bank Policy Rate. Source: Federal Reserve Bank of St Louis.

2. Selected countries’ Central Bank Policy Rate. Japan Annual (2000-) Central Bank Policy Rate. Source: Federal Reserve Bank of St Louis. Other countries’ Annual Averages (2000-) Central Bank Policy Rates. Source: Bank of International Settlements.

3. Japan Annual (1985-) Monetary Base. Source: Bank of Japan Monetary Base/Seasonally Adjusted Series code BJ'MABS1AA11X12 June Figure, 100m of Yen.

4. USA Annual (1985-) Monetary Base: The Adjusted Monetary Base Federal Reserve Board of St Louis, Seasonally adjusted; Total, Billions of Dollars, June Figure. Series code BASE.

5. Euro-area Annual (199-) Monetary Base. Source: European Central Bank, Euro-area Base Money, Millions of Euros, series code ILM.M.U2.C.LT01.Z5.EUR.

6. UK Annual (1985-) Monetary Base: Constructed by authors using data from the Bank of England, series codes: LPMB6NK, LPMBL22 and LPMAVAE.

7. Selected countries’ Annual (2000-) Broad Money Index (2015=100). Source: OECD, Monthly Financial Statistics, Monetary Aggregates, Broad Money Index.

Data series
Central Bank Policy Rates
Variables: Annual Central Bank Policy Rates for UK and selected countries.
Base Money
Variables: Annual Base Money and Broad Money Indices for Japan, USA, UK and Euro-area.

Download data
All the data series are available in Excel xlsx format: