BIS Review 6/2009  3  The current economic environment is a nightmare for policymakers. In the U.S. for instance, some commentators are complaining that Obama’s massive rescue package is too small, while the traditionalists think that it is far too large. Here at home, there is a view in some quarters that the Bank should move immediately to lower interest rates.
While a reduction in interest rates may contribute to boosting domestic demand and containing the economic slowdown, it’s our view that, with inflation currently at 14.3 per cent, lowering interest rates without some reasonable indication that inflation is on a downward path, would carry serious risks of further entrenching inflation and an inflationary psychology.