BOLSONARO NO PÂNICO / LULA NA GLOBO – 3 EM 1 – 26/08/22

A look at how effective interest rates are in reducing inflation? Although MPC appear to have been successful there is reason to believe monetary policy may not be without its drawbacks

On January 17th 2006 the MPC raised interest rates to 5.25%. The decision to raise interest rates, was seemingly justified a couple of days later, when inflation rose to an 11 year high of CPI 3%. This is on the edge of the governments inflation target of 2% +/-1. Although inflation is low by historical standards the MPC will be keen to move inflation back to its inflation target and maintain the strong credibility of monetary policy. Thus with inflation currently above its target the likelihood of interest rates rising is quite strong. Higher interest rates will dampen demand and hopefully keep inflation in check.