And, indeed, it has been argued – and there is evidence to support this view – that an environment of very low inflation and a prolonged period of very low interest rates may be conducive to an underpricing of risk, an imprudent increase in leverage and the emergence of asset price bubbles.
In such an environment, the central bank may face an inter-temporal trade off, if it aims at safeguarding financial and price stability over the longer term by tightening the monetary policy stance because of the potential impact of the tightening on shorter and medium term price developments.