This gives us a sufficiently long horizon to take account of financial imbalances in our strategy. Elements of a “leaning-against-the-wind” approach are therefore implicitly included. However, should there be signs of financial imbalances emerging, we need to carefully consider whether the use of standard monetary policy instruments is appropriate as a response. There are two reasons for this.
First, it could conflict with our mandate to preserve price stability. The BIS estimates that the financial cycle typically lasts around 16 years, compared with eight years for the business cycle. This asynchrony can lead to periods in which inflation makes a rate cut necessary, while the financial data favour the opposite.