The main objective of the central banks monetary policy is price stability, to maintain the value of money or to put it another way, to control inflation or the general increase in the prices of goods and services. Uncertainty about inflation and also future price levels is damaging to the proper functioning of the economy. With a stable general price level individual price signals can be read more clearly, and more reasonable decisions can be taken about whether to save or to borrow, how much to invest and consume and what and when to produce. In this way price stability can help to promote sustainable long-term economic growth.

The central banks monetary policy operates by influencing the cost of money, in other words the short-term interest rates. The Bank of England sets an interest rate for

Interest rates in the wholesale money market will normally be closely influenced by those at which the Bank of England conducts its operations. The decision by the MPC on the rate of interest is announced immediately after the monthly meeting and any change will be reflected quickly in the money market and in banks base rates, the rates they use to calculate their customers rates.

Apart from the domestic economy, changes in interest rates influence the value of sterling in terms of other currencies. If interest rates on sterling assets rise in relation to rates on other currencies then, if all things equal, money will flow into sterling and sterling's exchange rate will rise.

The Bank of England's daily operations to ease the shortage are conducted through a group of counterparties, which can include commercial banks, building societies and securities firms. They are invited to apply for funds either by the sale of bills or by gilt repo to the central bank. Depending on the size of the expected shortage, up to four rounds of operations may be held each day. If these operations are not enough to ease the liquidity shortage there is a late repo service for settlement banks.

A change in interest rates by the central bank will affect the economy in a number of ways. First a change in the cost of borrowing will affect spending decisions. Interest rates affect the relative value of spending today as opposed to spending later because a rise in interest rates will make savings more attractive and borrowing less so, and this will tend to reduce present spending both on consumption and on investment. Secondly a change in interest rates affects the cash flow of borrowers and creditors. A rise or fall in interest rates affects the cash flow of those with floating interest rate assets or liabilities. For example many households have floating interest rate deposits in banks and building societies. Floating interest rate debtors include h

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