The message being sent by central bankers around the world is that fighting inflation slowly and steadily will not succeed.
Andrew Bailey, governor of the Bank of England, announced an unexpected half-point increase in interest rates on Thursday. “If we don’t raise rates now, high inflation can stay with us for longer,” he added.
Despite the fact that inflation is slowing down in many nations after more than a year of interest rate increases, it is still higher than the 2% mark that many central banks are aiming for.
The main instrument available to central bankers to reduce inflation is raising interest rates. However, studies show that there is a lag effect of at least a year before a central bank’s activities are felt throughout the economy.
Due of this, the Federal Reserve decided to stop raising interest rates at its meeting in June after ten straight increases since last March. However, a lot of Fed officials are indicating that interest rates may increase again starting next month because they, like Bailey, don’t want to run the danger of losing control of inflation if they don’t.
Why does this moment seem to be so crucial?
The task of central bankers is extremely delicate. It appeared for a while that they could hike rates without seriously harming their economies. But time is finally catching up. Furthermore, since inflation is still greater than they would like it to be, taking unnecessary risks to reduce it is just as dangerous as not taking any action at all.
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