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Accommodatory policies
24th April 2010
An accommodatory policy is best described as a neutral macroeconomic policy stance in the face of an economic shock.
In the case of fiscal policy an accommodatory fiscal stance generally means keeping tax and government expenditure rates unchanged whilst an economy adjusts to changing economic circumstances.
For monetary policy, it generally means keeping (real) interest rates unchanged. This is the rate of interest adjusted for the effects of inflation.
In the UK and in many other countries in the last few years central banks have decided to move beyond an accommodatory stance and instead use monetary policy to deliberately stimulate demand and output in the economy in the face of the deflationary shocks from the world financial crisis.
The Bank of England cut policy interest rates from 5.5% in the autumn of 2007 to just 0.5% in early 2009 and base rates have stayed at this level now for over a year. In addition the BoE has introduced a policy of quantitative easing buying up to £200bn of government bonds in an attempt to boost the liquidity of the banking system and unfreeze the supply of credit to businesses and consumers.
Although some central banks have started to raise policy interest rates and begin the process of unwinding the policy stimulus, in the UK there seems little prospect of interest rates heading northwards in the months to come. For the moment, the Bank of England is in wait-and-see mode and base rates may well stay unchanged for the rest of 2010.
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.