In some cases, pulling only one single lever the wrong way is enough to threaten the stability of the system. This can lead to unintended consequences such as regulatory gaps, duplication or arbitrage. Let me discuss, at this juncture, a phenomenon known as the “cobra effect”. The cobra anecdote goes back to colonial India.
Of course, views also vary regarding the point in time at which the price outlook will have firmed enough to justify a change in communication and, ultimately, in the monetary policy stance. Let me share three thoughts on this issue.