In other words, the cumulative increase in interest rates required to contain upward pressures on inflation will be larger if the initial response is tardy or insufficient. 3. Central banks will frequently need to deal with inflationary pressures in the face of a weak GDP growth. The costs for economic activity of monetary policy actions have to be seen against the counterfactual.
Indeed, such costs will be higher in a scenario where second-round effects on prices arise. On the other hand, the definition of the time span over which convergence to the inflation target will be sought is a crucial element. 4. The exchange rate may have a significant effect on domestic prices in economies with large foreign trade sectors.