How do interest rates affect inflation?

It keeps the economy moving at a sensible speed But inflation staying high for too long is a problem Higher prices means employees will need higher wages... ...pushing up costs for businesses That could drive up prices further... ...potentially leading to an upward spiral of wages and prices Retail inflation in India has surged to 7.8% The combination of tepid economic activity and high inflation... ...poses serious challenges for the Indian economy going forward Central bankers are really concerned about setting expectations of inflation The idea is that, if it can show that it is credible... ...that it will always act to get inflation back down to 2%... ...then maybe it won’t have to raise interest rates... ...and then lower them in this kind of seesaw fashion Raising interest rates can slow an economy right down The trouble is, the brake pedal has a delay It can take as long as two years... ...to see the full results from interest rate changes Central banks know this So when they set interest rates... ...they’re actually trying to read the road ahead But predicting the future isn’t easy The problem is it’s difficult for the central bank to work out... ...whether the inflation will fall back on its own And even when central banks do get it right... ...they might still cause a crash It may be a blunt instrument, but raising interest rates... ...is still central banks’ main tool for taming inflation Central bankers would say that, yes, raising interest rates can be painful Slowing down the economy is not fun But it’s worth it It’s worth it to get low and steady inflation... ...so that in the long run, you don’t have to think about it Thank you for watching To read more of our coverage on interest rates, click the link And don’t forget to subscribe