In principle, the reason for this is that the interest rate increase is mainly aimed at dealing with the credit that drives inflation.
Theoretically, the price of the loans (or the cost of the loans) immediately affects only the new loans, while all other previous loans are not affected by this – It is easiest to see the limited effect of an interest rate increase for those who deal in real estate or who bought a house in the mortgage market before and are responsible for the interest rate increase.
Indeed: the bottom line – it takes time for the interest on the loans to mature, evolve, and produce some effect that is not just psychological.
Because of this, Central banks aiming to lower inflation should act at least two years before inflation rises, And that is why most of them try to predict the inflation for about 2-3 years ahead.
However, if the bankers know what needs to be done – which is good, but can they really do what they want? Well, that’s another question.
As is known, the round of interest rate hikes by the central banks began to take effect at least a year after inflation accelerated.
Although the banks have been catching up quickly in recent months, they tend to stop the increase before inflation actually dies down.
But did it all work?
Not really – with a two-year lag, consumer credit growth that was expected to decline sharply – did not.
And this is because the relationship between the credit interest rate and the increase in the benchmark interest rate – something that was agreed upon in economics books in the past – is becoming less clear in recent decades.
Another uncertainty is the relationship between credit and the price level.
It should also be remembered that many more factors control the aggregate price than those discussed here.
In conclusion, the faster the interest rate increase, the greater the risk of it being too excessive.
Never underestimate the possibility and severity of the recession aheadIf any.
And never forget that he may be the last thing to curb inflation in America.