They see that in higher costs for borrowing—in mortgage rates, lines of credit and business loans. But it is less obvious how higher interest rates are working to bring inflation down. Since March, we’ve raised the policy rate by 4¼ percentage points. In recent months, inflation has levelled off and has begun to ease.
Central banks in a number of advanced economies, including the United States, have brought short-term interest rates close to zero, so that further monetary accommodation can be provided only through unconventional tools, such as securities purchases and forward policy guidance. Meanwhile, the scope for fiscal stimulus is limited by concerns about sizable budget deficits and longer-term sustainability.