Banks were initially unwilling to lend at the start of the COVID-19 crisis
The effectiveness of interest rate cuts was limited as they were already at a very low level
The large-scale quantitative easing sowed the seeds for high inflation after COVID-19 lockdowns
Contractionary monetary policy used to tackle high inflation
1. Raised interest rates from 0.1% to 5.25%
2. Using quantitative tightening to reduce money supply
The Bank of England was slow to respond to rising inflation, initially downplaying the threat in summer 2021
Inflation has come down, but this has been driven more by easing supply-side factors rather than the effectiveness of contractionary monetary policy
Intentions of contractionary monetary policy
Tame higher-than-target inflation rates
Higher interest rates
Reduce household debt and promote more saving
Higher interest rates
Promote more sustainable lending and borrowing
Contractionary monetary policy has contributed to stagnating growth and rising unemployment in the UK
Higher interest rates have negatively impacted indebted households and businesses, with concerns about living standards and potential bankruptcies
Higher interest rates discourage business investment, which is already weak in the UK due to Brexit
Higher interest rates contributed to bank failures in early 2023, raising concerns about systemic risk, but strong regulation prevented a wider crisis
It is still too early to consider cutting interest rates, as core inflation and wage growth remain high, and the priority is to fully win the battle against inflation
