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Is this a time for central banks to be more cautious in raising interest rates?

Graham Watson

12th September 2022

Joseph Stiglitz has joined calls from some, notably David Blanchflower, for caution as regards central bank interest rate increases in the United States. Terrific stuff for Theme 2 and Theme 4 macro!

The argument is that interest rate increases are going to have little practical effect upon those supply-side factors driving inflation higher, but might trigger a recession by discouraging spending and, as a result, creating higher unemployment which, empirically, is more damaging to an economy that an uptick in inflation.

This is a lovely article from Phillip Inman about the nature of monetary policy, which looks at the conduct of global central banks and also highlights the difference between demand-pull and cost-push inflation.

In essence, Philip Inman argues that current rhetoric about tightening monetary policy to tackle inflation has had, and will have, little effect upon it, in large part because inflation is driven by higher energy prices.

Interest rates are going up sharply in Europe with the European Central bank announcing a 0.75% rise in all of its key rates: the deposit rate goes from 0% to 0.75%, the refinancing rate to 1.25% from 0.5%. Additionally, they've also given notice that they expect rates to rise yet further in the rest of the year.

As in the UK and the US, these rate rises are seen as a way of tackling Eurozone inflation which is expected to reach 9.1% in August.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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