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Forex Fundamental Analysis

Sat,05 Nov 2016-   FundamentalOutlook

An interesting event that befell on Friday 14th October, 2016 was when the governor of Bank of England replied to Ms. Theresa May the Prime Minister to not to articulate him how to sort out his job as she during her speech of party conference criticized the independent policies of BOE. The question that arises here is, whether it’s favourable for sterling Pound and England’s economy right now to let the interest rate (monetary policy) be determined only by the independent Central bank? To answer this important question a differentiation between independent and dependent central bank and its respective policy is required.

 The central bank is delegated with implementation of monetary policies, examinations of interest rates, regulating the money supply, government’s banks and performing as the lender of last resort, controlling foreign exchange, reserves of gold, and the stock register, it controls and orders the banking sector and institutes the interest rates in order to manage exchange rates and inflation rates. And if the central bank is not independent it can result a country to fall into financial upheaval. Basically the government of a nation appoints the officials of central bank and their role is to manage monetary policy (interest rates) and maintain low inflationary degree. “The independence of central bank:

Independence indicates that central bank is free from any political, legislative, or executive control of the government. It also indicates that it is free from private or groups control in that it never serves the interest of few individuals but rather the whole nation. It should therefore be free to undertake its mandate without external pressure that may stall economic progress and monitoring” (Alesina, & Summers, p.152).

If the central bank is dependent then it can cause political cycles that means mandatory government search for to impact the economic cycle to accord with elections. That is when elections are near the government can follow the following steps

An increase in the interest rate leads to an increase in disposable income that leads to higher growth rate and thus leads to a downward trend of unemployment level. And this can help the principal party to the achievement of re-election. But the problem with this reduction in interest rate is that it can cause long run inflationary pressures and to overcome this issue the winning party can increase interest rate to reduce inflation pressures where this whole scene can result into recession. Its best example is of UK 1980’s “boom and bust”.

 In 1997 the Bank of England was made independent. Even though the Central Bank is independent, it is important to abide by in notice, that the targets (related to inflation and interest rates) can be rearranged by the government. So the independence of BOE is what is required right now as already the economy of England is facing many problems because of Brexit issue and the government is in pressure as well so as an independent body Governor Carney can take better steps as compared to any political party. 

Aimen Tayyab
Financial Analyst