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Monetary Policy - How does raising interest rates control inflation?

Geoff Riley

17th July 2022

The Economist has produced this excellent eight-minute primer on how a rise in interest rates can help to control inflationary pressures.

Just last week, the Canadian central bank raised their monetary policy interest rate by one per cent in a single hike. Other central banks including the Bank of England has preferred a more gradualist approach.

Read: Bank of Canada increases policy interest rate by 100 basis points, bringing key lending rate to 2.5%

The Bank of England's Chief Economist gave a speech recently on the means by which they hope to bring inflation back closer to the 2 per cent target.

"Getting inflation back to our 2% target is important if we are to have a stable economy that supports people’s jobs and incomes." Read his speech here

At the time of writing the BoE's base (bank) rate is 1.25% but it is expected to climb higher as we head into the Autumn.

Graham Watson's insight:

The interview with Andy Haldane outlines the structural challenges that continue to bedevil the UK economy.

Indeed, Andy Haldane argues that the usual supply-side issues remain and that only an ambitions government with a coherent economic plan would be able to do. However, we've been aware of most of this for nearly 40 years and there's been little progress since then. And as for 'levelling up' - whilst he might believe that there's a case for it - it's never been something that I've been convinced by.

In this video we look at countries (in 2022) where monetary policy interest rates are really high and also those where interest rates are negative.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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