No. 791 - Approaching the terminal rate and the way forward: a model-based analysis
The paper evaluates the macroeconomic effects of ECB policy rate paths alternative to those inferred from market participants' expectations (baseline scenario) and discusses the associated risks. Two paths are considered for illustrative purposes: in the first one (peak), rates increase to a higher terminal level and decline more rapidly thereafter; in the second one (persistent), they are kept initially unchanged but are reduced later and more slowly.
Compared to the baseline scenario, consistent with price stability over the medium term, the peak path would allow inflation to be more decisively affected over the next two years, at the cost of output losses; it could also induce a marked worsening of financing conditions. The persistent path would have similar macroeconomic effects to the baseline scenario, but it could fuel risks of de-anchoring inflation expectations and second-round effects, which, however, appear contained at this stage.
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25 July 2023
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