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Level 10

Monetary Policy


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Base rate
The interest rate set by the Bank of England which affects the costs of borrowing for banks and through that the interest rates on mortgages, loans etc.
Monetary Policy Committee
The group of nine economists including the Governor of the Bank of England who meet each month to set the base rate to try and keep inflation within its target range of 1 - 3%.
CPI inflation
The inflation measure targetted by the Bank of England.
Time lag
The time it takes for base rates to have their full effect on inflation, estimated to be 18 months.
Transmission mechanism
The model the Bank of England uses to demonstrate how the base rate feeds through the economy to affect inflation.
Open letter
The letter the Governor of the Bank of England has to write to the Chancellor if inflation is higher than 3% or lower than 1% to explain why.
Forward looking indicators
Economic variables that give some indication as to the future path of the economy e.g. business confidence.