Loic ignores the suggestion of lower rates.
If we are going to have some bad news, I would rather it be followed by some good news rather than another round of bad. Will 11% be enough? I would rather have a short sharp jolt than prolonged stagflation. With rates at 3% over inflation, and is merely at the tighter end of normalcy. Certainly it will force some businesses that are just barely scraping by into bankruptcy, and coupled with the introduction of VAT might send us into a recession, but it is not certain to do so, depending on the trend of the world economy. In that environment, inflation would start to come down, but slowly.
Now 13% would certainly trigger a recession. But it would also tempt businesses to borrow dollars and convert them to Ducats, leaving their currency risk uncovered. For one business, it is a risk that the owners are entitled to take, but if too many do it, it could jeopardize the stability of the fixed ratio between the ducat and dollar, swelling our exchanges reserves at first, and possibly expanding the money supply if you don't act to sterlize that influx, and then, when the currency flows reverse, draining our reserves and perhaps forcing a devaluation.
I guess the real test will be how the markets react to the move. If they are convinced of your anti-inflation credentials, then long term interest rates could actually decline slight as the 10 year bond prices rally. I don't think the stock market will take it quite as well in any case.
If we are going to have some bad news, I would rather it be followed by some good news rather than another round of bad. Will 11% be enough? I would rather have a short sharp jolt than prolonged stagflation. With rates at 3% over inflation, and is merely at the tighter end of normalcy. Certainly it will force some businesses that are just barely scraping by into bankruptcy, and coupled with the introduction of VAT might send us into a recession, but it is not certain to do so, depending on the trend of the world economy. In that environment, inflation would start to come down, but slowly.
Now 13% would certainly trigger a recession. But it would also tempt businesses to borrow dollars and convert them to Ducats, leaving their currency risk uncovered. For one business, it is a risk that the owners are entitled to take, but if too many do it, it could jeopardize the stability of the fixed ratio between the ducat and dollar, swelling our exchanges reserves at first, and possibly expanding the money supply if you don't act to sterlize that influx, and then, when the currency flows reverse, draining our reserves and perhaps forcing a devaluation.
I guess the real test will be how the markets react to the move. If they are convinced of your anti-inflation credentials, then long term interest rates could actually decline slight as the 10 year bond prices rally. I don't think the stock market will take it quite as well in any case.