A sharp rise in inflation such as the one this year is difficult to predict, even for economists. In a piece for Mint, Dr Niranjan Rajadhyaksha, Executive Director, Artha Global, writes that central banks’ efforts to control inflation are a delicate balancing act, and “the optimum interest rate is not set in stone.”
Excerpts below:
“Despite the nuanced situation in each country, a quick look at the data shows that there is good reason why most central banks are now more concerned about controlling inflation than stimulating economic activity. The pace of monetary tightening needed from here on depends on a combination of two trajectories—inflation and output. There is a big question embedded in this: At what point should central bankers be satisfied enough to stop monetary tightening?”
“A lot depends on their assessment of the neutral or natural rate of interest, which can broadly be understood as that level of the real interest rate at which an economy grows at its potential while inflation is near the inflation target, preferably over the business cycle rather than in a single year or quarter. […] The neutral interest rate thus defined is not set in stone, but depends on the state of the business cycle. In the jargon of economics, it is time-variant.”
Read the full article here.
