However, interest rates increased again during 1994–95, despite a slow economy caused in part by weak oil prices; to some extent, interest rates rose because markets perceived that the associated exchange rate depreciation would loop back into inflation pressures, forcing the Bank to tighten policy eventually.
With the benefit of hindsight, it is likely that this market dynamic reflected the fact that domestic inflation expectations had not yet become anchored by the Bank’s new inflationtargeting policy, which in turn made it difficult to keep one-time relative price effects on inflation distinct from the underlying trend in inflation.