This damage could occur if the relative price changes needed to induce the supply response spilled over into broad inflationary pressures, necessitating tighter monetary policy and creating further upward pressure on the exchange rate. This is one reason why reducing the Government’s demand for resources through fiscal consolidation is so important.
The Dangers of an Interest Rate Strategy There are natural dangers inherent in interest rate targeting, at least in the absence of a rule that guides its adjustment to changing economic conditions.