(Original post by Amos36)
Hey there Dan!
Good questions! In terms of why Mervyn King is pursuing expansionary monetary policy at the moment, remember that there is almost always a conflict of objectives
. Remember that usually sustainable economic growth
and minimal unemployment
frequently come at the cost of high inflation
and a worsening situation with the BOP CA/C
The reason why inflation is so high at the moment is because of cost-push factors
(such as rising oil prices and increasing wage rates in the economy). Considering that there is currently a UK recession (two last quarters of GDP growth were -0.3%
), there is no chance of demand-pull inflation in the economy.
Because of contractionary fiscal policy
by George Osborne, Mervyn King has decided to pursue expansionary monetary policy
in order to cushion the blow of severe public sector cuts to try and combat the UK budget deficit
of £126bn per annum
Remember that the BOE is completely independent
of the Chancellor. The BOE is responsible for monetary policy
and the Chancellor, Treasury and OBR are responsible for fiscal policy
. The decision to raise VAT from 17.5% to 20% was a fiscal decision by George Osborne.
The Conservatives traditionally favour indirect taxes
(e.g. VAT) because they are regressive
and hit the poorest income groups hardest and the current Tory cabinet is made up almost exclusively of multi-millionaires who are only concerned about themselves and their garishly large mansions in the country.
They may blame the Labour government perhaps rightly for only taking a short-term approach to the economy, but the Conservatives are no better. Their economic and electoral strategy is simple: get all the austerity out the way in the first few years and prolong the impact of the global economic slowdown and then when the economy picks up naturally because of the trade cycle by 2015, they'll try and take all the credit for it.
Oh, sorry... that's me being biased again. Whoops...