Professor Michael McMahon:

I am happy to take that question. There is extensive cross-country literature on the effects of interest rates. The channel that is being referred to is called the cost channel of monetary policy. While interest rate rises have an effect on cost, the evidence is strongly against it dominating the other channels, such as the effect of the reduction of demand overall. As far as I am aware, there is no credible evidence that the cost channel of monetary policy drives inflation up more than the other effects offset it. I do not put much credence in that, although it is a question the Deputy could put to the Central Bank.