- Higher rates haven’t taken as a big a toll on the economy as expected
- Evidence suggests that although monetary policy transmission might have slowed, it hasn't turned on its head
Today’s combination of high interest rates and buoyant economic performance is a puzzle. Such a puzzle, in fact, that it's tempting to think something highly unorthodox: could higher interest rates actually be stoking the economy?
The chart below illustrates the path of interest rates in the US and UK over the past 30 years. Although rate hikes have been both rapid and intense, the impact on economic activity has been far more muted. The UK has just exited one of the mildest recessions on record, and the IMF expects the economy to expand by 0.5 per cent over the course of 2024.