They have seen the short-term relationship between inflation and aggregate demand become more uncertain, and their ability to influence long-term interest rates, which has always been limited, has weakened. In addition, in a world of extraordinary global liquidity and asset price inflation, it is more difficult to assess the size of output gaps and the level of the neutral interest rate.
One aspect that appears not to have changed much is that monetary policy affects inflation and inflation expectations with a variable and potentially long lag. Monetary policy can take around 12–18 months to have its peak effect on inflation. Policy outlook 1.