Does inflation rise when the policy rate is raised?
News, Staff memo Although there is broad consensus that inflation falls when the central bank raises its policy rate, there are mechanisms and channels that may lead to the opposite effect. For example, interest rates also represent a cost for households and companies that, when they rise, can cause higher inflation, or relative prices, instead of the desired decrease.
In a Staff Memo, Stefan Laséen and Charlie Nilsson describe the challenges that one faces when measuring the effects of monetary policy. When these challenges are taken into account, they find that monetary policy has a tangible and significant negative effect on inflation. Interest costs for households rise in a similar way to the policy rate after a rate rise. But the total effect on inflation is negative. In other words, inflation falls when the interest rate is raised.
By Stefan Laséen och Charlie Nilsson, working in the Monetary Policy Department.
Staff memo
A Staff Memo provides members of the Riksbank’s staff with the opportunity to publish advanced analyses of relevant issues. It is a publication for civil servants that is free of policy conclusions and individual standpoints on current policy issues. Publication is approved by the appropriate Head of Department. The opinions expressed in Staff Memos are those of the authors and should not be regarded as the Riksbank’s standpoint.