Saturday, May 31, 2008

Why Interest Rates Must Go Up

It adds fodder to the argument that higher interest rates are having no effect on the initial drivers of inflation: rising international food and fuel prices.

NVDL: Actually, high interest rates will start to have an effect, even indirectly, on food and fuel prices. The cost of credit or of borrowing, when it goes up enough, begins to impact negatively on consumption, which impacts negatively on the equilibrium price level. People operating out of their personal circumstances will have a lot to protest about, but the reality is that interest rates must go up. Consumption/demand, needs to be reined in. I don't like it, you don't like it, but it's the only way to get people to change their habits as it pertains to consumption.

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