However supply side shocks such as those which affected food prices and the exchange rate in 2011 will have serious long term consequences for inflation, long after the shocks themselves have dissipated, if they are allowed to spill over into a much broader range of prices, such that inflationary expectations become entrenched in the mind of the public.
This is why it was imperative for the BOU to tighten monetary policy in 2011, by raising interest rates. Interest rates are the main tool of a modern monetary policy in a market economy. The rationale for raising interest rates last year was threefold.