Monetary policy and trade-offs Even if we knew the future perfectly, we would face important choices about how quickly and strongly to react to economic pressures and to seek to restore future inflation to target. These choices have impacts on the economic volatility during the adjustment period. The PTA recognises this trade-off.
It requires the Bank to seek to avoid unnecessary instability in interest rates, output and the exchange rate in its pursuit of the price stability target. This is known as flexible inflation targeting and all inflation-targeting countries take the same basic approach. The forecasting framework enables these trade-offs to be systematically addressed and balanced.