AS Macro Key Term: Expansionary Monetary Policy

An expansionary monetary policy (also known as a relaxation of monetary policy) means an attempt to use monetary policy to boost or reflate aggregate demand, output and jobs.

Typically this involves a central bank cutting official policy interest rates. It might also involve a relaxation of credit controls and in some countries, Quantitative Easing has been used involving the creation of new money by the Central Bank to purchase debt from banks and boost their capacity to lend to individuals and businesses.

The Bank of England cut official policy rates from 5.5% in the early autumn of 2008 to 0.5% in February 2009 in a bid to stabilise confidence and demand during the descent into recession. Quantitative easing worth £200bn (or 12% of UK GDP) has also been used to provide an extra flow of funds in the UK banking system in a bid to unfreeze credit supply and support an economic recovery.

A fall (depreciation) in the exchange rate is also an expansionary monetary policy

UK Short Term Interest Rates

Data from Timetric.

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United Kingdom from Timetric

UK Effective Exchange Rate Index

Data from Timetric.

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Effective exchange rate index Sterling (Jan 2005 = 100), daily from Timetric

Bank of England View (Inflation Report, February 2011)

“Expansionary monetary policy, combined with growth in global demand and the past depreciation of sterling, should ensure that the recovery in the UK is maintained. But the continuing fiscal consolidation and squeeze on households’ real purchasing power are likely to act as a brake on the economy.”