Monday, 17 August 2015

Inflation rate

Why is the government so convinced that 2% is the ideal rate and how long does an interest rate hike take to effect the outcome?

It is now being questioned as to the viability of keeping the historic low rate of 0.5% any longer as it could harm the economic growth of the country.

Last month Mark Carney [Bank of England Governor] said that inflation could start to rise next year and that interest rates could follow, should it not be the other way round?

This begs the question that are higher interest rates are inflationary or is economic growth inflationary?

In the short run, the BoE decision to raise rates is indeed often contractionary, but that is because they typically raise rates by cutting the money supply, which is more contractionary than the higher interest rates are expansionary.

Presumably the BoE work with models, so what does the model say when a 0.5% rate rise takes place now?

No comments:

Post a Comment