But when consumers think inflation will be high, businesses don’t worry as much that higher prices will scare off customers, so they are more inclined to raise them. That’s why we have been so determined to keep inflation expectations well anchored at the 2% inflation target.
We do that mostly through communication—by being crystal clear we are committed to restoring price stability—and by backing those words with action. To summarize, the Bank directly controls only the first step—the change in the policy rate. The other steps in the transmission mechanism are less direct, and they take time to have their full effect.