Eli5, why are interest rates raised slowly every month rather than in one bigger chunk when inflation is so high?

Question

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?

In: 35

Answer 1

They don’t want to drive the economy into a recession. In effect, the Fed plays a “signaling” game. By indicating that it will continue to fight inflation, it sets the expectation that inflation will not increase and this can be a self fulfilling prophecy.

A sudden and steep rise in interest rate can trigger asset price collapses and business failures due to lack of liquidity. This would be a very last resort for the Central Bank.