Explain the pre-emptive monetary policy, Macroeconomics

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Explain the pre-emptive monetary policy

Since 1992 UK monetary policy has been 'pre-emptive'. In pre-emptive monetary policy authorities announce that they are prepared to raise interest rates even when there is no immediate sign of accelerating inflation in order to anticipate and head-off a rise in inflation rate which would otherwise occur many months later. The policy-makers at the Bank of England estimate what the inflation rate is probable to be 18 months to 2 years ahead (the medium term), if policy (which is, interest rates) remain unchanged. If forecast rate of inflation is different from target rate set by the government, the Bank changes interest rates to prevent forecast inflation rate becoming a reality in future. Interest rates are also raised or lowered to pre-empt any likely adverse effect upon inflation rate of an adverse 'outside shock' hitting the economy.

Though following the near meltdown of the UK economy in 2008 and in response to deep recession of 2009 it is fair to say that for a time at least, British monetary policy became reactive instead of pre-emptive. This means that interest rates are set (and further bouts of QE are introduced) not so much with medium-term future in mind though in reaction to falling national output (in the recession) and growing unemployment.

 


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