Anetial Market Essay Example | Topics and Well Written Essays - 1500 words

Anetial Market - Essay ExampleInflation is a measure of changes in prices over a specified period and the objective of the monetary policy is to coif the interest rate so that inflation can be brought back to target within a reasonable duration. camber rate is therefore an essential tool used by the Bank of England to tally the inflation rate. When Bank believes inflation is beginning to rise, it raises interest evaluate to cool the economy and vice versa. stock-still this formula has many exceptions as proved by the recent rate cuts by the Bank of England. Although pulverisation gate inflation (based on prices of good leaving factory) reached a 16 year high in December 2007 influenced by rising oil and food prices and CPI stood at 2.1 %, the Bank still went beforehand with rate cut. It is interesting to understand why.Although bank rate is used as a tool to visualize inflation, it is first important to understand that there are different ways of measuring inflation. The Consu mer Prices Index (CPI) and sell Prices Index (RPI) are used in UK to measure inflation and usually have separate values. This is because of the variation in goods and serve they cover and the method of calculation.The Government inflation target, which is currently 2%, is based on CPI. ... aper the most important difference that needs to be considered is that CPI does not include genuine caparison costs, such as mortgage interest payments. The reasons for the rate cut was not a unaffectionate decision by the Bank of England but was influenced by the crisis in the global financial market as a result of what has now come to be known as subprime mortgage crisis. Subprime is the general landmark used to refer to lending to borrowers who do not normally qualify for standard market rates for various reasons such bad credit history or lack of stable income. Obviously these borrowers are a greater risk to the financial institutions. For many years, Cleveland in America was the major market for the sub-prime lenders where the brokers sure the residents that they could obtain cash by refinancing their homes, but often neglected to properly explain that the new sub-prime mortgages would limit after 2 years at double the interest rate (BBC, 2007). As the home owners were subsequently unable to afford repayments, this resulted in a wave of repossessions. As the sub-prime lending had spread across America, the selfsame(prenominal) story has been repeated.As many borrowers defaulted on payments, the financial institutions felt the credit crunch which reflected on some other developed economies such as UK. The lenders in UK tightened their loan conditions in response to the US financial slump, especially in the sub prime market which has influenced the price of property in UK. The profitability of the financial services sector, which has been a key driver of UK economic growth in recent years, has also been affected.As the housing demand in UK showed a decline, th is resulted in a general fear of economic slowdown. At this stage, the Bank of England faced a dilemma between a rise