If media reports are to be believed, interest rate rises will choke economic growth and inflation largely by crunching the budgets of households with mortgages – forcing them to slash spending on essentials. Monetary policy traditionally was not meant to work this way and if that is in fact happening, some changes in policy and bank responses are warranted to reduce the resulting hardship.

Those who can remember textbook macroeconomics of decades past (such as the IS-LM analysis) will recall that monetary policy (interest rate) changes were expected to operate primarily on real investment in plant and equipment (rather than household consumption) by changing asset values. Increased rates would reduce the present value of future cash flows from new real investments, causing them to be scaled back or deferred.