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Is raising interest rates the best way to tackle inflation?

The last few months have been predictably eventful for the Bank of England. Following the 12th consecutive increase, the current base rate is 4.5%, the highest in 15 years, i.e. since the era of the Global Financial Crisis in 2008. The rate is projected to increase up to 5.0% by the end of the year given the expected resilience of high inflation and the surprising resilience of the economy. However, we could expect interest rates to rise higher if inflation persists being high.

A usual question is why the Bank of England, or any other central bank for that matter, raises interest rates in order to curb inflation. The framework, although complex and occasionally incomplete, is based on the foundational economics idea of supply and demand.

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