Every month the BofE raises the interest rate bit by bit, knowing inflation is so high and knowing they had to raise the rates quite high, why do it so slowly?
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The main reason is that it takes a long time for the effects of a change to propogate through the economy (you’ll hear a popular phrase in media coverage, “the lags are long and variable”). So if they make a bigt change, or smaller changes very rapidly, it would be easy to go too far too fast. By the time you realize that you raised them too high and started to reduce them again, the damage will already have been done. So they make small changes and give them some time to take effect before making another one, to rpevent “whiplash” response in the economy.
Imagine you’re trying to tow a trailer behind your truck. But instead of a nice rigid metal hitch, its attached to your bumper with big stretchy rubber bands. If you floor the accelerator, your truck will zoom off while the bands stretch out, and the trailer will only start moving slowly. You keep accelerating up to 60 mph and level off at that speed. But the trailer is 100 feet behind you and only starting to slowly gain speed. Eventially the trailer gets pulled back by the rubber bands and slams into the back of your truck. If instead, you verrrrrrry slowly accelerated, to give the trailer time to gain speed too, then as you slowly approached 60 mph you can slowly ease off the gas, and then you and the trailer are both doing 60 with no terrible accident. Thats what the fed is trying to do.
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