Policymakers singular focus adds to rate cut uncertainty

Our baseline forecast for policy rates is consistent with central bankers continuing to focus almost exclusively on inflation. Their laser-like inflation focus and higher-for-longer bias are understandable after such a large and sustained inflation overshoot. But once inflation is firmly back at target and this bias reverses, it will eventually be a key source of downside risk to our policy rate forecasts.

What you will learn:

• If central bankers were to adopt a more balanced consideration of growth and inflation dynamics, then – based on our forecasts and a range of monetary policy rules – rates would fall more quickly than we and the markets currently anticipate.
• Inevitably, central banks will eventually swing to putting more emphasis on growth prospects in their decision making – probably once the inflation battle has been decisively won and questions over credibility have been silenced. But the timing will be subjective and so this, in addition to the uncertainty around our forecasts for inflation, is a key risk to our forecasts in the years ahead.
• The longer that central banks remain at the hawkish end of the spectrum, as implied by simple policy rules, the greater the chance that inflation may undershoot in the medium term.