Report
Patrick Artus

If there is a shift to a new economic regime where inflation averages well over 2%, would central bank’s inflation targets have to be changed?

We can think that due to the appearance of multiple scarcities (labour, energy, commodities, etc.), economies will permanently move to a regime of higher average inflation, well above 2% (3%, more?). Central banks then have the choice: Between keeping the inflation target at 2% and conducting a continuously restrictive monetary policy; And changing the inflation target (3%?) to adapt it to the new economic equilibrium. Changing the inflation target comes at a high cost, with the central bank losing credibility and the risk of triggering a surge in inflation with a lasting loss of the anchoring of inflation expectations. But being forced to keep real interest rates abnormally high for a long time also comes at a very high cost.
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

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