Finance on Boe, Ecb and Fed

Introduction

Monetary policies suggest greater attention over the world by renewed the interest in employing the central banks to control the money supply. Role of monetary policy is important to maintain a low and stable rate of inflation and price stability in the economy.(Rangarajan,1998) Imbalances of the import and export can cause the fluctuation of the exchange rate in the country. Different central bank used different monetary tools to control the money supply and maintain the economic stability of the country.

Monetary Tools Used to Control the Money Supply Bank of England (BoE)

BoE used standing facilities (SF) and interest rate (IR) to control the money supply of the countries. SF is used to provide a safety value for the market liquidity management and it provides an arbitrage instruments in a standard market condition to prevent market rates different from Bank Rate.(Red Book-BoE,2010) SF allows bank to manage unexpected frictional shocks which may arise due to technical problems in the bank system or in the settlement infrastructure. IR is used to control the inflation rate by injecting money directly into the economy by purchasing assets and it does not involving in printing more bank notes. This shows many other rates available to savers and borrowers by movements in the Bank Rate affect the spending by companies and their customers and over time the rate of inflation. IR will cause the increase in exchange rates in Sterling relative to overseas and would give investor a higher return on UK assets.

2. European Central Bank (ECB)

ECB used main refinancing operations (parts of Open Market Operation) and minimum reserve requirements as their monetary tools. Main refinancing operations are regular liquidity that provides reserve transactions with a frequency and maturity of 2weeks. The rate of these repos is the greatest signs of the stance of monetary policy in a very short term by the role in fulfilling the aims of Eurosystem (Hann,2002) and provides the bulk of refinancing to the financial division. Minimum reserve requirements is used to stabilise money market IR by the averaging provision.(Scheller,2006). A minimum reserve ratio of 2% (Gray,2011) is applies against overnight deposits, deposits and debt securities within a 2 years maturity and money market paper. ECB is able to broaden the range of financial institution to hold reserves at central bank in order to avoid possible disintermediations and its negative effects on bank activity in euroland. (Hann,2002)