monetary policy committee is responsible for setting interest rates in the uk.
monetary policy committee is responsible for setting interest rates in the uk.
who is responsible for setting interest rates in the uk?
monetary policy committee
although the bank of england is responsible for setting interest rates, the chancellor also plays an important part in the monetary policy structure. he sets the inflation target which the bank must set interest rates to meet. under the bank of england act 1998 the chancellor has the power of appointment of four out of nine members of the bank's monetary policy committee – the so-called 'external' members. he also has a high level of influence over the appointment of the bank's governor and deputy governors, and has the right of consultation over the appointment of the two remaining mpc members from within the bank. the act also provides that the government has the power to give instructions to the bank on interest rates for a limited period in extreme circumstances. this power has never been officially used.
chancellor of the exchequer
however, the financial industry strongly voiced opposition to such a measure, claiming that it would create additional uncertainty as to the value of mortgage loans (and by extension, the collateralized debt obligations into which they are bundled). in addition, like in the late 1970s, the financial industry had powerful political leverage on its side: the risk that revoking the cramdown restriction would result in higher interest rates on home loans. it was impossible to simultaneously enact a law preventing the industry from jacking up interest rates on all home loans; that would have raised the possibility of bank runs, because few investors would keep their money at an institution that is legally prohibited from setting interest rates on its loans to accurately reflect the underlying credit risk. to prevent bank runs, congress could have simultaneously imposed capital transfer restrictions, but that would have paralyzed the global economy. as few politicians wanted to be blamed by wall street for making homes unaffordable or causing even more bank failures or a second great depression, the proposals for revoking the prevention of cramdowns on loans secured by primary residences never found much traction in congress.
cram down