... set too high demand will be much lower. Interest rates have to be set on what inflation might be over the coming two years, this is because after a recession when output has been failing, there will be a lot of spare capacity in the economy, which means output will be able to rise strongly without inflationary pressure. If inflation goes up, interest rates go up, but when this happens, demand for goods go down, and inflation also goes down. A change in the official Bank Rate could have some immediate effects, such as; consumers confidence which may influence spending straight away. Generally a change in the official Bank Rate takes time to influence consumers and businesses behavior and decisions. Basically, today, a change in interest rates will be likely to have a huge effect on output over a period of time, approximately a year, and on inflation over a period ...

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