Dr. Gillian Phelan:

It is a good question. To follow up on what Dr. Kelly said, taking monetary policy action has to be done with careful consideration and understanding what is driving it. We know and we can see out there that taking this action is not costless; it has a cost for firms and households. We also know that not responding is even more costly because inflation imposes enormous costs on society. When action is delayed or weak, those costs are even greater.

We know interest rates have increased an unprecedented ten times in 14 months.

This represents a very significant tightening of monetary policy at a very fast pace. Reflecting the Deputy's comment, it shows the significant challenges we have in terms of price stability. When thinking about taking action, very much as my colleague said at the beginning, when inflation started to rise, it appeared very much like a supply shock. The overlocking and interlocking shocks led to some persistence in inflation. At that point, it started to feed into demand, and it is at this point that monetary policy action can help. Monetary policy action cannot do anything about supply shocks, on which it has no impact, but it can slow demand to bring it back down in line with supply, which will then bring down inflation.

On one of the Deputy's other points, it is important not to overreact, say, with one big jump. If we know we need to get to a certain level, why would we not go to another level? There are a couple of reasons, but a fundamental one would be that monetary policy action is not a precise science. Taking these steps incrementally gives us time to assess how monetary policy is tracking through the system, how strong transmission is and the impact on firms and households. Were there no cost to taking monetary policy action, we would do that jump. However, the fact the costs are there means we have to balance the risks on either side to make sure we are leading to the best outcomes for the economy.