Higher interest rates will affect the financial situation of firms. [27] Capital and labour will have to adjust to changes in relative prices. All this takes place against the backdrop of a series of shocks that have already hit the economy. Some adverse scenarios of the past have already materialised.
If an economy is struggling and inflation is low, it’s an easy call to cut rates. If inflation expectations are well-anchored in line with the target, it’s easy to look through temporary supply shocks, such as oil or food price spikes.