Slide 1:
The monetary policy actions by the Bank of England determines the amount the bank will charge as interest when it lends to other banks. This interest rate is vital in determining the rates at which banks will lend to their customers such as businesses and institutions.
If the bank of England charges higher rates of interest to banks, this obviously increases the costs of these loans and in retrospect, the banks must raise their lending rates to customers. Higher lending rates means few customers will be willing to borrow from banks and may switch to other lending institutions such as non-bank financial institutions like Sacco's and credit cooperatives where they can access cheaper loans.
Slide 2:
Monetary policy places a regulation on banks on the amounts that they can retain that should not be lent out to customers. Bank reserves normally increase during times of recessions and reduce during times of economic expansion. Requirements for higher bank reserves imply that banks have lesser amounts of money to lend to their customers and alternatively means rates of interest will be high.
Slide 3:
The Bank of England’s monetary policy committee determines the rates of interest payable to buyers of government securities such as treasury bonds and treasury bills. If the rates of return on these government securities is higher than the prevailing market rates that banks are charging borrowers of loans, then banks may be forced to invest most of their money in these government securities that are considered less risky than lending to individual borrowers.
Slide 4:
Increased money supply in the economy due to monetary policy recommendations may lead to higher prices in the economy. This leads to an unwillingness by businesses to borrow from banks due to reduced buying power of consumers. This may prompt banks to seek other investment options that may be costly for them due to a depressed economy.
Slide 5:
Monetary policies that increase the money supply in the economy can lead to inflationary pressure that has a negative impact on consumption levels. Reduced consumption by households may be due to higher commodity prices. This means that industries will reduce their output due to low demand for their products in the economy. Reduced output means that the industries will reduce the number of employees. High unemployment rates in the economy can be catastrophic to banks since individual borrowers and businesses will have no interest of seeking loans.
Slide 6:
The role of monetary policy to determine the rates of return that accrue to most investors especially in the money market may lead to capital flight. This is because these investors will make comparisons between the rates of returns in the country and overseas and opt to shift their capital overseas if they are guaranteed of higher returns. This action reduces the demand for local currency and increases the demand for foreign currency. This impacts negatively on banks and money market players as it interrupts the balance of payments.
Slide 7:
The level of savings in the economy is determined to a greater extent by the price levels. This is because higher prices reduce ability of households to invest since most of the income is spent on consumption. Lack of savings by households implies low activity for banks due to reduced earnings in terms of fees and bank charges they charge account holders.
Higher prices also reduce spending on non-basic needs that translate to reduced activity for most businesses. Such businesses also have little to save with banks as most of their earnings are spent in operational activities. High price levels and inflationary pressures if not checked finally lead to closure of businesses as they fail to breakeven.
Slide 8:
Low rates of borrowing in the domestic economy can increase the level of business activity and investments thus spurring the demand for local currency. However, unavailability of local investment opportunities can lower the demand for local currency and increase the demand for foreign currency. This would increase the exchange rates for foreign currency and can have a serious impact on the balance of payments.
Slide 9:
The level of economic growth is directly determined by monetary policy rules put in place by the Bank of England. Economic growth levels determine the nature of activities for banking firms since higher economic growth indicates there is a high level of savings by households and businesses that are done through banks.
Slide 10:
The nature of monetary policy actions has a direct impact on foreign direct investment in the country. Increased foreign direct investment increases the earnings of banks since most of these direct investments are made in terms of finances that are banked with banking firms.
