Why raising interest rates won’t help the economy – but may harm central bank credibility

 Why raising interest rates won’t help the economy – but may harm central bank credibility

While the eyes of the world are on Cop26, we are entering a moment of profound fragility for the world economy, as major central banks struggle to cope with the aftermath of the pandemic and ongoing supply disruptions. Far from being “temporary” or “transitional”, as central banks and high-spending governments have argued, the spike in prices over the past 18 months looks likely to continue for the foreseeable future. Talk is now turning to the imminent prospect of increases in interest rates across the major developed economies, with the Federal Reserve Board in the US and the Bank of England’s rate-setting Monetary Policy Committee both due to meet this week.

But to start pushing up interest rates now would be a serious policy error. The immediate impact of a small adjustment of the Bank of England’s base rate matters less than the clearest…

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