The Telegraph, October 12, Professor Patrick Minford
It is hard not to be alarmed by the sharp hikes in long term interest rates around the world recently, including in Britain, where the rises under Liz Truss’s brief government look modest by comparison.
It is astonishing that the world has gone from virtually zero interest rates a few years ago to rates of 5pc or more today and the latest expectation that central banks will keep them there for some time even as inflation continues to fall. This is presented as central banks “making sure” that inflation is well and truly stamped on.
This monetary volatility is a far cry from the central aim of monetary policy – which is to keep inflation and the economy stable in the face of supply and demand shocks. Central banks around the developed world from the end of the 1980s either got independence to set monetary policy or had de facto independence formally recognised, with the explicit objective of creating such stability.
However, since the Covid crisis, they have failed to do so. They created a massive monetary expansion and ensuing inflation as supply bottlenecks and the Ukraine war caused commodity shortages. Interest rates were driven to zero by these policies, causing widespread capital misallocation at this zero price.
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