Bank of England's Warning: Financial Instability, Job Loss, Interest Rate Increase - Essay Sample

Introduction

The bank of England has warned that due to the openness of the country's financial instability, jobs will be lost or jobs will be gained, and prices based on the market status will increase, and decrease frequently. Due to the number of loans being given out, the Bank of England will have to increase their interest rate since the quantity of money being given out will be excessive, and unaffordable considering the money given to Brussels to pay into Europe will be going to NHS and other UK based companies. In terms of European stabilization, the EU will be unstable, as the bank of England will cut them off from funding. (Begg et al., 2019) This allows the UK to put the money they would fund Europe through the homegrown companies and businesses, to improve the overall macroeconomics of the community, as well as employability for UK citizens.

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When it comes to the bank of England and Brexit, there are a lot of questions that need to be answered. Such as, how will they import and export? Will they be more lenient with loans? According to the Financial Times, "The government wants banks to commit not to immediately cut lending after the UK leaves the EU on October 31, according to one person briefed on the meeting agenda. The meeting will also consider setting up dedicated funds to ensure that small and medium-sized companies have enough credit supply to deal with any disruption, and will encourage banks to help with broader government initiatives" (Megaw, 2019). A massive aspect of Brexit that may seem unimportant or overlooked is the UK populations' trust in the government. Regardless of what the government or bank decides to do, it's unimportant if the people don't trust the government or the bank. This makes it critical that they still manage to give out loans to the people, maybe at a higher added interest considering what the state of the government and banks will be in. But, most importantly, people will trust the banks and the process, and that's just as important as the macroeconomic situation being Brexit.

Adding on, importing and exporting will be different. According to The Week, approximately 44% of all UK exports went to the EU in 2017, while 53% of all UK imports came from the EU - Considering these numbers, post Brexit deals will have pros and cons for businesses. In terms of domesticated produced goods, customers in the UK will likely find the scenario of choosing between in-country grown goods, or more expensive imported goods. In total, potentially homegrown UK businesses have an upper hand when it comes to making revenue versus imported goods because of Brexit.

More so, considering the Boris Johnson law with the customs union, the UK loses its ability to free trade, which inevitably makes trading more difficult, and some trades that would be completed pre-Brexit, won't be completed post-Brexit. Considering the total cost of a pound is lowered by 15-20%, this makes trades with international powerhouses such as the US, China, and India very competitive. This quote from Felix applies more details to how Brexit affects international trade, "However, a great part of profitable trade lies in geographical proximity, a factor we simply cannot get around. Not only could that but, with US President Donald Trump advocating trade protectionism, small businesses face additional headwinds abroad."

In terms of employment, EU people employed in the UK are in more danger than others because of Brexit. The increase in inflation will make the cost of labor high, which can easily reduce a firm's profitability. For firms to maximize their profits, they must reduce the number of their workers to reduce the cost of labour. The shift of various companies in fear of Brexit also contributes to unemployment because firms will relocate their operations and other business activities to countries outside Britain.

The effect of Brexit also increases inflation of UK banks by 1.7%. This ensures that the banks must incur additional cost on labour and production for both households and other firms. The increase in inflation will make the banks of England incur high operating cost such as the cost of labor, high-interest rates, and other banking cost reduces the profitability of the banks. Also, because banks of England must incur high costs to operate effectively, it must reduce its number of workers in response to the high cost of labor. As a result, reduces the income level of other families. This also hurts the living standard and consumption level.

The increase in the cost of household reduces the consumption level of each household because the income of every household cannot be enough to buy adequate commodities due to the increase in aggregate price. It is estimated that Brexit increased the cost of the economy by 2% of GDP in 2018 and this reduces the cost of living for various people. Inflation ensures that a family or an individual has to part with a lot of money to buy adequate food products. This is because the increase in the cost household reduces the disposable income of the people and this prevents them from buying luxury goods but rely on basic goods.

Figure SEQ Figure \* ARABIC 1. The long run Aggregate supply curve (LRAS) is vertical at the full employment output.

Brexit also reduces the level of investment in England. Because of high inflation, the cost of buying investment machines or assets is also very high. Furthermore, the cost of finance is also high and this prevents people from taking investment risks. It is estimated that Brexit reduces 6%, which reduces economic development and growth of England. It is very difficult to save and invest because of Brexit, the cost of living becomes high. Therefore, there is no money to save and invest. This is because people would use their income on consumption but not on investments. A reduction in investment level increases the demand for labor as more jobs will be lost, thus increases the unemployment level. Low supply that results from low investment level ensure that firms within the country employ less people than expected.

Brexit also has an impact on trade policy. It reduces the number of international businesses, that takes place in Britain. Most of the British firms enhance their offshoring to European Union immediately after the referendum of Brexit (Johnson and Mitchell, 2017). This result in a reduction in the number of European firms that wanted to invest in the UK market. As a result, the number of goods and services that are being exported to other countries reduces significantly, and this reduces the GDP of the country.

Figure SEQ Figure \* ARABIC 2: The Phillips curve mode. The short-run Phillips curve (SRPC) and The long-run Phillips curve (LRPCC).

Figure SEQ Figure \* ARABIC 3: relationship between the Phillips' curve model and the AD-AS model.

The existence of Brexit also reduces consumer's confidence on various goods and services. The economic crisis that results from Brexit makes people and firms to be more creative and look for ways of increasing their income. As a result, they produce goods and services that may not be suitable or unreliable to consumers making them lose confidence in what firms in Britain are producing (Sampson, 2017). The demand for goods and services will also increase significantly. High inflation makes the cost of production very high. This reduces the number of goods that are produced in the country. This is as a result of low supply due to low production capacity.

The Brexit also makes most banks in England to shift their assets, offices and the business operations to other countries, which are outside Britain. In fear of serious economic hard times, they had to shift to other countries where they can enjoy huge profit margins. It is estimated that at the end of 2019 most financial institutions have moved their assets and other business operations of about US$130 billion to other countries. This affects the production capacity of European countries, thereby increasing the demand for various products, which these countries have to import from other countries. Also, more than 269 business organizations, especially in banking sectors, relocate part of their businesses to other countries, and this hurts the employment level. The effects of Brexit influence forces of demand, and supply (Megaw, 2019). Demand is the quantity of goods, and services that the customers are willing, and able to buy while supply is the quantity of goods, and services that are available in the market. The increase in inflation because of Brexit increased the demand for labor because Brexit will reduce the number of firms in the country.

Conclusion

Brexit has an impact on public development. Countries in England will require their people to pay less tax or have a tax cut or increase Government spending. A tax cut reduces government revenue to reduce inflation. The increase in government spending will also ensure that there is a large amount of money in circulation. This will increase the demand for various goods, and services to attract investors from other countries. Therefore, various banks, including the central bank, need to introduce measures that can spur economic growth, and make European countries more attractive than others. These can be done by either employing various economic measures such as monetary, and fiscal policies to reduce inflation so that business firms may not shift their assets, offices, and business operations to other countries outside Britain. This increases the demand for goods, and services because of the low supply of these goods, and services in the country.

Reference

Megaw, N. (2019). "UK Government to Urge Banks to Keep Lending After No-deal Brexit." Financial Times, 30, www.ft.com/content/1c45b61a-cb3f-11e9-a1f4-3669401ba76f.

Armour, J (2017). "Brexit and financial services". Oxford Review of Economic Policy. 33 (suppl_1): S54-S69.

Begg, I., and F. Mushovel. (2012). The economic impact of Brexit: jobs, growth and public finance." 2012, www.lse.ac.uk/europeanInstitute/LSE-Commission/Hearing-11---The-impact-of-Brexit-on-jobs-and-economic-growth-summary.pdf.

David, J. (2016). "Brexit cost investors $2 trillion, the worst one day drop ever". CNBC. Retrieved 26 June 2016.

Johnson, P and Mitchell, I (2017). "The Brexit vote, economics, and economicpolicy". Oxford Review of Economic Policy. 33 (suppl_1): S12-S21.

Partington, R. (2019). "Bank of England Warns No-deal Brexit Could Trigger Economic Shock." The Guardian, 11 July 2019, www.theguardian.com/business/2019/jul/11/bank-of-england-warns-of-lending-crisis-for-eu-firms-after-no-deal-brexit.

Sampson, T. (2017). "Brexit: The Economics of International Disintegration". Journal of Economic Perspectives. 31 (4): 163-184. doi:10.1257/jep.31.4.163. ISSN 0895-3309

Sebastian, A. (2019). "Bank of England Says Banks Able to Cope with a No-deal Brexit." This is Money, 9 Oct, www.thisismoney.co.uk/money/news/article-7553869/Bank-England-says-Britains-banks-able-cope-no-deal-Brexit.html.

The Week UK. "How Will Brexit Affect UK Imports and Exports?" The Week UK, 1 Dec. 2017, www.theweek.co.uk/advertisement-feature/90140/what-will-happen-to-uk-imports-and-exports-after-brexit.