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Financial Management and Institutions

Role of Central bank in UK

Introduction to Financial Management

Central bank of any country is a financial institution which provides monetary and management on nation's bank facilities for government of the nation. It is tool to making plans and monitoring on monetary policies same as issues currency of country. This report is to understand central bank functions and regulatory monetary policy relations with financial institutions of UK. Bank of England is world's second largest central bank of UK. The bank issues currency and regulates monetary policy and responsible for management of all commercial banks. This report will present economic environmental effects during fluctuations in interest and tax rates. With the help of Basel Accords solution for reduction in interest risks and techniques for economic development would be able to express through this project report. Therefore, the report will provide an overall review on Bank of England that how the bank face global issues as well management of currency and monetary policy implementation. A great knowledge would be acquired related to financial markets of United Kingdom and Central bank's interfere and manner to sustain its position worldwide.

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1. Role of central bank in implementing monetary policy

Monetary policy of UK refers to process in which Bank of England makes plans to manage supply of currency and takes action for adjustment during flexibility in inflation rate or tax rates. It aims to price stability and global financial growth. Bank makes decision by analyzing GDP and proceeds to business expansion for all organizations of the country (Schularick. and Taylor, A., 2012). The central bank of UK provides limit to financial institutions for interest rates same as maintain UK economic market. Monetary policy has instruments involves short term interest rates and banks reserves. It plays great role to implement monetary policy of UK.

To gain price stability:- Bank of England manages supply of money and issue currency of UK. By analyzing all aspects regarding pricing and economic terms, central bank leads to decision making process for supply of pounds. On focus upon stability of price during inflation or deflation bank makes planning strategies for economic balance. It is helpful to monitor financial flexibility (Galí, J., 2015). Through open market operation approach, institution tries to adjust supply and sources of money. The central bank plays role to create and follow a structural framework to short term interest rates at repos. During inflation, bank reduces and provide guidelines to other financial institutions to decrease interest rates (Jiménez. and et.al., 2014). As similar, during deflation time, it increases or guide other banks to improve interest rates. Therefore, it remains helpful to price and economic stability of UK financial market.

Monetary management:- In management of currency and money related planning Bank of England plays vital role to plan and monitor over monetary issues. Through monetary policy rules and regulations, bank create a positive environment to maintain monetary issues as per make highest position in international market. Money related terms involves CRR, SLR, repo rate and reverse repo rate are manged by central bank of UK. According to market situations, to handle inflation or deflation, bank changes in rates and reserve rates for other commercial and developing banks of the country. Hence, a stability occurs economically considers beneficial for all financial institutions including business enterprises and all kinds of entities.

To maintain foreign exchange policy:- Monetary policy consists helpful to create a structure regarding exchange rate regime (Gertler. and Karadi., 2015). Dynamics in foreign exchange rate is useful for supporting in proper structure to balance economy of the nation. More fluctuate exchange rate influences high level of economic stability. On behalf of financial balance, some countries do not fix foreign exchange rate to create balancing atmosphere through systematic monetary decisions.

To bridge BOP Deficit:- BOP deficit refers to disturbance in balance of payment (Auerbach, A. and Gorodnichenko., 2012). It occurs due to increase in spending and decrease in outcomes or earnings. Therefore, it leads to economic instability of UK production and profit. Bank of England plays role to reduce the issue by increase in exports and decrease in imports. For financial development and constant growth of UK in international market, central bank of country focuses to make bridge between spending and gaining of productions.  It proceed to improve monetary structure of the world as well tries to create link and healthy and positive environment globally.

Thus, Bank of England of UK market plays a vital role to implement monetary policy and results to economic stability of country. The central bank concentrates on above mentioned factors for financial growth for all UK institutions.

2. Current economic environment of Bank of England and effects of monetary policies on financial market

Economic environment of any country is on the basis of financial stability (Arrow, K. and Kruz., 2013). Effect of monetary factors as interest rates and tax rates decided by central bank of UK creates atmosphere of inflation and deflation. Market position involves production and distribution of supply of money and price strategy of goods and services depends on demand (Hansen, A., 2013). Consumer demand effects fluctuation of money supply. Analysis of economic environment presents financial position of nation. Environment of UK is fluctuated by recognition of past years economy and latest financial position. Recently, the economic condition of the country seems at downwards direction. The country is suffering from inflation that is raise in price situation. It is due to imbalance in productivity and profitability of resources obtained in UK market. Day by day price of goods and services and increasing in imports. Recently, the bank rate of UK is cut down to 0.5% which was 0.25% in August. The Bank of England determines the additional cause of the problem is unemployment and lack of resources in UK country. Due to increase in inflation rate, UK suffers from more decrease in interest rate, which is unfavorable for country's monetary development. Hence, it results to flexible position in international market. To solve out the issue, bank should try to increase in export as well decrease in import (DeLong, J. and Summers, L., 2012). The matter can be solve out by seeking to balance monetary policy's rules and regulations. Maintenance in bank rates is required to economic stability and reduce recession. Bank of England expects to increase bank rate at 0.10% till 2017. Therefore, a stable atmosphere of economy would be beneficial for UK market.

Effect of monetary policy on financial market:- Monetary policy considers as a tool to implement economic stability and development of any nation by increasing and decreasing bank rate or interest rate (Afonso. and Sousa, R., 2012). Bank of England as central bank of UK makes monetary policy plans and determines ideas to expand businesses. Policy also tries to balance between spending and gaining withing countries of the world. Through applying monetary policy by UK central bank, it remains helpful for economic stability and impacts on UK market in effective as efficient manner.

Increase in investment:- Monetary policy process is helpful to boost investment for UK (Blanchard, O. and Leigh., 2013). Stimulating financial growth is possible through direct or indirect investments. Monetary policy tries to reduce imports and improve export quantity. Therefore, production would be increases same as raising repo rate and reserve quantity would be effect positively. Rise in price can be control cost qualitatively. Direct impact on investment effects interest rates, while indirect impact seems to expectation that inflation will be reduced.

Portfolio positioning:- Changes in monetary policy is beneficial for investors to stimulate return by this factor (Treasury., 2016). It gives power to tolerate risk and investment implementation. Therefore, cash, reserve and various advantages of investment improvement would be come to result. Bank of England can make planning policy for investment through portfolio positioning factor. It is useful for take actions for conservative investors to protect gain. Decrease in higher rate influences investment at high level.

Impact on transaction of financial instruments:- Financial instruments involves federal reserve, share, bond, deposits and loans. Proper strategic planning of monetary policy effects on selling and purchasing quantity of financial instrument. Decrease in interest rate reflects increase in deposits and loan facilities. Demand of consumers towards bank facilities would be increases.

Thus, monetary policy planning will be effective to solve out inflation issue and it results to economic stability of UK and high level financial position in global environment.

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3. Negative rate impacts on central bank effectiveness

Through monetary policy planning strategy, central bank decreases interest rates according to economic environment. It aims to motive people for spend more and save less. The bank reduces interest rates which would be resulted to economic stability of UK. When rates reduces, increasing in demand for loan and borrowing seems to be effective. It plays great role in foreign investment and overall worldwide development and encourages lending. Australian politician Scott Marrison says that increasing in negative interest rate impacts on central banks effectiveness as well monetary policy seems to be exhausted and effective. It effects country's monetary stability and improves willingness of consumers towards loan facility. Monetary policy plays great role to balance inflation in situation of rise in prices for resources. Central bank of UK guides to commercial banks and financial institutes to decrease interest rates and bank rates (Leary, M. and Roberts, M., 2014). Therefore, discouraging in saving and encouraging in investment would be increases rapidly. Position of banks and international transactions improved at high level in global financial market.

Efficiency of financial institutions:- Financial institutions like banks and finance company who provides loan facilities implements loan demand through decreasing interest rates (Gertler., Kiyotaki. and Queralto., 2012). It results to reduction in saving and boosts people to investment. Financial organizations gain profit at large scale and effects development of investment. It also relates to reserve ratio and quantity which bank gives to central bank, on behalf of which central bank makes monetary policy. A recognition of economic environment is analyzed and action plans for monitoring activities activates.

Encouraging borrowings:- Due to decreasing in interest rate, borrowing increases. It results to employment and increasing in loan quantity. Entrepreneurs tries to organize business but feels lack of funds during operating entity. So, this problem remains to be decreased as he takes advantage of loan facility. It develops bank's funds by earning interests. Therefore, bank's reputation and earning implements through borrowing encouragement source.

Decreases savings:- Encouraging borrowing reflects saving in negative form (Kashkari., 2016). Although increasing borrowings is beneficial for financial institutions on the other side, it is negative for people also. People less deposits in bank  therefore saving discourages. Imbalance occurs in public economic condition as they takes funds from institutions more and less saves. It reflects to financial position of UK societies and business organizations.

Impact in global market:- International transaction activity of export and import effects reputation of monetary institutions. Negativity of interest rates increases production and distribution facilities of resources. Therefore, implementation in production and profit earning identifies. Exim bank which facilities loan facility for export and import services affects due to fluctuations in interest rates. It consists to make and sustain great position in international market and economic development of UK leads to be improved.

Therefore, Scott Marrison opinion on negative interest rate reflection creates understanding to learn impact of negative interest rate on economic framework of UK market. It is suitable for monetary stability and reduction in inflation. It affects various rates within banking organizations for business expansion. It is useful to make position of qualitative production and profit gaining regarding optimum allocation of resources.

4. Global issues effect on monetary policy and budget of UK

Monetary policy decides plans to implement economic stability of UK. It sets targets to improve financial position of any country. Australia suffers global issues due to fall out from Brexit and US presidential election. It reflects to fluctuation in economic balance of the nation. Therefore, budget planning and implementation of budgetary control effects. A flexible environment creates and issues arises globally. Monetary policy and generating ideas to budget strategy considers as difficult for UK. Globally, it effects on many factors such as inflation-deflation, imbalance structure to implement export and import position. It also effects on supply of money and unsystematic management of resources. Fund allocation and facilities of goods and services remains uncertain monetary planning and its imbalanced environment.

Effect on reduction in pound:- Due to Brexit and economic condition flexibility, reduction in currency of UK occurs. It reduces exports and improves imports. Therefore, imbalanced production and distribution seems to be unstable. Demand for resources and pricing fluctuations as interest rate and bank rate indicates as a tough task to make budget. Budget is for further activity to implement goods and services production. Elasticity of demand for products comes from buyers. It effects management of currency and budgeting strategic planning to achieve balance of payment as to create equality in spending and gaining quantity.

Evaluation of exchange rate policy:- Global issues reflects UK monetary policy and budget to make plans for further activities of fund allocation. It involves foreign exchange management budgetary planning. The fluctuations in interest rates, tax rates including international trade exchange rates analyses to leading balance of payment structure. Monetary policy helps to make decisions for action planning on behalf of market situation. It effects on funds sources as well investment. Monetary policies tries to make changes in rates so economic condition of country can be obtained.

Impact on balance of payment:- Balance of payment objects to balance between payment and gain stability. Global issues related to Brexit and US presidential election effects on financial structure of UK. Proper balance between export and import including funds analyses here. Therefore, it reflects financial effectiveness of any nation. UK tries to create balancing atmosphere of fund allocations and makes budget planning to sustain economic framework for UK development.

Impact on market situations:- Monetary policy makes plans to balance market environment as fund allocation. Due to global issues, inflation and deflation conditions occurs and creates unstable atmosphere for global market. Hence, market situations are occurs due to demand of product and production efficiency. It results to prepare budget and budgetary planning to take actions for further implements in UK market. It presents actual performance of effectiveness and efficiency of production as well profit earning capability of any business or financial institutions of UK market.

Thus, global issues like Brexit and US presidential election effects on economic condition of UK reflects position of monetary stability in international market also generates ideas to prepare budget and strategic planning for global development.

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5. How authorized deposit institution deal and corporation of Basel Accords with credit, liquidity, operating and interest rate risks in UK

Authorized deposit institutions is an institution which encourage to take deposits from consumers at high level. It involves banks, credit unions and societies. It remains a vital tool to collect money by gaining deposits and utilization of money to develop effectiveness and efficiency of country as well financial institute. It aims to financial development of country same as increase in cash, liquidity and tries to reduce risks of imbalanced spending and gaining structure. Bank of England motive UK people for saving through attracting interest rates. It pulls customers to provide high interest rate on saving and deposit accounts. The authorized deposit institutes is authorized under Banking act, 1959. It involves guidelines and implementations of payment facilities.

Basel Accords involving papers like discussion papers, draft standards and various pillars to make a structural framework to set goals in different kinds of fulfilling requirements of deposit and increasing stability (Lane, P., 2013). The institution provides deposit guarantees to encourage saving and saving habit in UK people. The deposit institution breaches reporting regarding necessary elements of financial terms. It reduces risks by probability and impact rating system remains helpful to reduce risks and implement action plans to solve out the issues. It is helpful to regulate and manage funds of banking organizations as per Supervisory Oversight and response system also useful tool to decrease risks and makes pillars for achieving effectiveness in depository system of banking institutions.

Except above mentioned, ADI involves additional techniques to encourage saving and deposited re monthly banking statistics remains helpful for analyzing proper balance of spending and gaining overall balance of payment. Performance of banking institutions and effectiveness in deposit increases credit ability of financial institutions useful for reporting standards. The authorized deposit institution is helpful to authorize and implement information regarding financial tools and monetary policy plays great role in economic stability as well institution's planning strategies for development of nation at large scale. Collection of all branches' effective and generating ideas to gain economic stability and environmental factors related to banking sectors. The institution creates a strategy to implement action plans for increasing in deposits and attract UK people to deposit an depository money at high level through optimum allocation of funds. It is helpful to utilize sources and investments to improve cash and creditably of UK effective environment.

CONCLUSION

The report on financial management and institutes is helpful to understand various aspects of financial terms to manage central bank of UK as Bank of England. It is an effective tool to express monetary policies and economic stability solution during inflation and deflation situation of financial market. It provides a great idea to sustain banking position in international market and optimum allocation of resources. The report generates idea to create balanced environment between spending and gaining position of monetary transactions. Monetary policy and budgeting planning strategy to plan and implement actions for saving and investments. It produces financial intermediaries elements to sustain development of economy on the basis of Basel pillars. Manner to solve out global issues of Brexit and US presidential elections consists useful process to direct upward monetary stabilization. Bank of England ideas to manage and control regulatory forms of selected organizations. Therefore, a proper economic stability presence ability to encourage funds as sources and investments. A systematic approach creates by understanding aspects of financial institutions and effectiveness of economic development of UK market.

REFERENCE

  • Afonso, A. and Sousa, R.M., 2012. The macroeconomic effects of fiscal policy. Applied Economics. 44(34). pp.4439-4454.
  • Arrow, K.J. and Kruz, M., 2013. Public investment, the rate of return, and optimal fiscal policy (Vol. 1). Routledge.
  • Auerbach, A.J. and Gorodnichenko, Y., 2012. Measuring the output responses to fiscal policy. American Economic Journal: Economic Policy. 4(2). pp.1-27.
  • Blanchard, O.J. and Leigh, D., 2013. Growth forecast errors and fiscal multipliers. The American Economic Review. 103(3). pp.117-120.
  • DeLong, J.B. and Summers, L.H., 2012. Fiscal policy in a depressed economy. Brookings Papers on Economic Activity. 2012(1). pp.233-297.
  • Galí, J., 2015. Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press.
  • Gertler, M. and Karadi, P., 2015. Monetary policy surprises, credit costs, and economic activity. American Economic Journal: Macroeconomics. 7(1). pp.44-76.
  • Gertler, M., Kiyotaki, N. and Queralto, A., 2012. Financial crises, bank risk exposure and government financial policy. Journal of Monetary Economics. 59. pp. S17-S34.
  • Hansen, A.H., 2013. Fiscal policy & business cycles. Routledge.
 
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