Unconventional Monetary Policy

• What tool do central banks conventionally use to influence the economy?

  Interest rates
• How do central banks use interest rates during a recession?

  They cut rates to stimulate consumption and investment
• What was the interest rate cut by the Bank of England during the Great Recession?

  From 5.75% to 0.5%
• Why were conventional monetary policy tools ineffective in 2009?

  Economic growth was contracting with no room for cuts
• What are the unconventional monetary policy tools mentioned?

  • Quantitative easing
  • Forward guidance
  • Funding for lending
• What is forward guidance in monetary policy?

  It manages expectations about future interest rates
• How does forward guidance affect business confidence?

  It prevents a fall in animal spirits
• What happens if businesses expect an interest rate rise?

  They reduce borrowing and investment
• What was the main problem with the Bank of England's forward guidance?

  They did not follow through on their promises
• Why is the impact of forward guidance limited?

  It lost credibility after failing to raise rates
• When did the Bank of England offer forward guidance?

  After the 2008 Great Recession
• What was the Bank of England's promise regarding interest rates and unemployment?

  To raise rates when unemployment hit 7%
• How did the lack of credibility affect the Bank of England's forward guidance?

  It undermined the policy's effectiveness
• What is the summary of forward guidance's purpose and problems?

  • Purpose: Manage expectations about future interest rates
  • Aim: Maintain confidence and encourage borrowing
  • Problem: Lost credibility after failing to raise rates
  • Impact: Limited effectiveness in influencing economic activity
• What was the aim of the Funding for Lending Scheme (FLS)?

  To increase lending, investment, and consumption
• How much money was created for the Funding for Lending Scheme?

  £70 billion
• What was unique about the interest rate for loans in the Funding for Lending Scheme?

  It was lower than the Bank's base rate