These pressures will need to be borne in mind as the incoming government considers its fiscal options. We are conscious that the eventual adjustment of the high current account deficit could make the job of maintaining price stability more difficult in these circumstances. In the short-term, an exchange rate adjustment has the potential to boost inflation via its direct effect on tradables prices.
How problematic this might be for monetary policy would largely depend on the timing and magnitude of the exchange rate adjustment, which is something over which the Bank has little control. A falling exchange rate in the context of continued strength in domestic spending would tend to generate stronger inflation pressures.