In 1997 the bank ofengland gainedoperational independenceto set monetary policy.Their recent policy has putinterest rates at
their lowest in histroywhich is currently at
0.5%. Interest ratesdetermine
the cost of borrowing andthe reward for saving. Thelow reward for saving
will encourage householdsto spend there moneyrather than save because
with low interest rates andhigh inflation, financiallythey’d be worse off saving.Regarding the reducedcost of borrowing, thebiggest type of borrowingyou’d do in your life is
taking out a mortgage.The repayments on yourmortgage will drop as longas your mortgage is a
variable rate mortgagethat tracks the banks ofEngland's base rate.Paying lower repaymentswill increase an individuals
disposable income andthis is likely to lead tothem
consuming more goodsand services. The lowermortgage repayments willalso cause the demand forhouses to
increase. As demandincreases so will the value(price) of houses whichcreates a
wealth effect which makespeople feel they are
more wealthy as theirproperty is now worthmore and this will lead tothem
consuming more goodsand services even thoughtheir income has notrisen. Secondly the lowercost of borrowing willincrease the demand of
big ticket consumerdurables because thesetypes of goods andservices are expensive andoften require a loan i.e.
white goods or a car. Allthis increase inconsumption from thechange in interest rateswill lead the governmentachieving its macroeconomic objective of
economic growth. As theeconomy grows andincrease output this willalso help reduce
cyclical unemployment aslabour is a deriveddemand for output. Theincrease in consumptionwill also lead to a
multiplier affect where asunemployment falls,average income will riseand consumption will riseagain. The bank ofEngland have stated thatinterest
rates will not rise untilunemployment falls below
7%. This suggests that theBank of England’s aim isnot only to controlinflation but also achievegrowth too.