Since 2021, inflation has risen and monetary policy has been tightened in many countries, as central banks have both increased their policy rates and reduced their holdings of financial assets. For example, the Riksbank has raised its policy rate from zero per cent in February to 2.5 per cent in November, and the forecast for the policy rate at the end of 2024 has simultaneously been raised from 0.25 per cent to 2.8 per cent. Since November 2021, the expected policy rate at the end of 2024, as can be measured in financial markets, has also risen by around 2 percentage points, and longer-term market rates have risen by roughly the same amount. Central bank policy rates are thus expected to be considerably higher for several years to come than financial market participants expected just a year ago, and this is reflected in the interest rates for households and companies.

A key question for central banks is how much tightening is needed to stabilise inflation at the inflation target. Or in other words: How large are the effects of monetary policy on inflation? This question has been discussed in the media recently, partly based on model estimates presented by the Bank of England (2022) and the National Institute of Economic Research (2022).^[2] See for example Svenska Dagbladet (2022). These estimates give the impression that monetary policy has relatively small effects on inflation. In this commentary, we discuss the effects of monetary policy on inflation using a number of macroeconomic models. Our message is that changes in monetary policy that are expected to be temporary have only small effects on the economy and inflation. However, changes that are expected to last for a longer period of time, such as those we are seeing now, can have significantly larger effects.