Why are interest rate rises not taming inflation?

 

Neither Federal Reserve chair Jay Powell nor European Central Bank president Christine Lagarde expect inflation to return to their common 2 per cent target before the start of 2025. 

 Monetary policy always comes with a lag, taking about 18 months for the impact of a single rate increase to fully seep through into spending patterns and prices.

Monetary policymakers began raising rates less than a year and a half ago in the US and UK, and less than a year ago in the eurozone. They went higher than the neutral rate — where they are actively restricting the economy — only a few months ago.

But some central bankers and economists believe lags may be even longer — and the effect of the tightening less potent — this time around.

Shifts in the housing market may be key in explaining why interest rate rises are taking longer to bite.

Labour markets are historically tight in most countries

The Bank for International Settlements warned last year that, if interest rates are raised too little or their effect is much delayed, countries might slip into an environment where high inflation becomes the norm.

The risk is that shifting back to 2 per cent inflation may require central bankers to increase borrowing costs to a point where they endanger the health of the financial system.

FT 4 July 2023

https://www.ft.com/content/3e46ef18-1c75-4fc3-81fa-37fc580659c1

The threshold interest rate above which the central bank triggers a problem of financial stability

Niall Ferguson Bloomberg 18 december 2022 

https://englundmacro.blogspot.com/2022/12/the-threshold-interest-rate-above-which.html