These two channels together bring about a decline in real interest rates. This decline boosts firms’ and households’ economic activity, which in turn leads to higher inflation rates, supported by higher inflation expectations. As people actually experience inflation, inflation expectations will rise further. Inflation expectations represent the core element of the mechanism of the Bank’s monetary easing.
Against this backdrop, we have the dynamics of inflation expectations: how they have been increased by the Bank’s policy and how the aforementioned three exogenous factors have hindered a rise in inflation expectations. This is the first issue to be analyzed in the comprehensive assessment.