Introduction
Inflation, growth, manufacturing, consumers, exchange rates,
exports, employment, wages......
There seems to be a long list of terms that might be relevant
to the Bank of England/Times Interest Rate Challenge. But do
not be put off by this, or by the thought of too much economic
theory or too many statistics, or the jargon and the "buzz"
words of the day. The level of knowledge and understanding needed
to take part in the Challenge is for your team to decide. It
will probably be greater in some areas than others. You may
want to concentrate on a few key factors. This might depend
on what is being covered in the classroom or has already been
taught, or what the participants think is most important for
their assessment of the outlook for inflation and thus the interest
rate decision. You will have to decide where to draw the line.
The main requirement is that your team builds up a convincing
case to justify its interest rate decision - that is the Challenge.
Monetary policy is not just about looking at inflation and
interest rates. It is also about the growth of the economy,
employment and, ultimately, our collective living standards.
But all these considerations are framed around one policy objective
- low inflation - and one policy tool - the official Bank Rate.
The Challenge asks teams to set and justify an interest rate
that is, in their view, consistent with meeting the Government's
inflation target. Target Two Point Zero invites schools and
colleges to assume the role of the Bank of England's Monetary
Policy Committee and make a presentation that sets out their
view on current economic conditions and future prospects, culminating
in an interest rate recommendation aimed at meeting the inflation
target. The inflation target is currently 2.0% and teams should
decide what interest rate they would set to achieve this target.
The interest rate has to be set in the real world - it is a
practical policy tool. Economic theories and concepts can guide
our understanding of the economy and help to explain what we
observe around us, both in the economic statistics and first-hand.
But they cannot tell us what inflation will be or what the interest
rate should be. Interest rate decisions depend on an interpretation
of current economic conditions and events, and judgements about
the likely future path of the economy. Many considerations will
be relevant to the outlook for inflation - some more so than
others, and to a different degree at different times. Evidence
on the economic picture is often unclear or contradictory. Some
factors will point to less inflationary pressure others to more.
That is why judgement is central to setting interest rates.
There is no complex formula to work out or a mechanical rule
to follow. The interest rate decision is based on the best information
that we have to hand. That is never perfect, nor does it result
in a definitive or certain answer. So when you are reading the
resource material, you will find information and tools to help
you make your interest rate decision. But the answer will be
up to you. We look forward to your economic assessment, your
monetary policy decision and an imaginative presentation.
The purpose of the website is to tell you in a clear and concise
manner about the main factors that are relevant to what the
Challenge is all about - setting interest rates to control inflation.
The resource material does not repeat what you can find in text
books or in other course material, and we are not going to overload
you with everything that is, in some way, connected to monetary
policy. Instead, it helps to explain in a practical way how
the economy and monetary policy work, and what factors determine
and influence inflation and interest rate decisions. We hope
the resource material will benefit you not just in the Challenge
itself, but also in expanding your understanding of the economy
and monetary policy more generally.
The Target Two Point Zero website contains a large amount
of information. But do not be overwhelmed by this. It is designed
to be a comprehensive reference source for teams to use as an
aid to their preparation.
YOU DO NOT NEED TO READ AND UNDERSTAND EVERYTHING ALL AT
ONCE. You can refer to the website when necessary.
The majority of schools and colleges will have access to the
Internet and will prefer to use the information and data in
this form. However, Internet access is not necessary to take
part in the Challenge. If you participate, the resource material
will be sent to you in printed form.
If you participate in the Challenge, we will contact you about
this.
YOU DO NOT NEED TO TAKE ANY ACTION AT THIS STAGE.
A brief summary of each of the main sections of the Target
Two Point Zero website is available on the Home
page. A more detailed description can be found in the introduction
to each section.
Although we will provide you with information and data that
are relevant to setting interest rates, you can use whatever
information you think is relevant from whatever source. You
can access the Bank's regular monetary policy publications using
the links below.
Interest Rate Decisions
MPC Minutes
Inflation
Report
Bank of England Home Page
In addition, from 17 September 2007, The Times will
run a series of fortnightly briefings in support of the Challenge.
These will be in the Business section and will also be on The
Times' website.
We hope you find the website helpful and enjoy the challenge
of setting interest rates for the UK economy. If you have any
comments about the Challenge, you can e-mail us at:
targettwopointzero@bankofengland.co.uk
©2000-2008 Bank of England.
