This is the oft-mentioned ‘long and variable lag’ of monetary policy, and is another motivating reason for a meeting-by-meeting, gradual approach to the calibration of monetary policy. On the pace of adjustment, and the likely end-point for rate rises in this cycle, this will be informed by the incoming data on inflation, wage growth, expectations and financial conditions.
If it points to competitiveness problems in a country – for instance a loss of market share inside the euro area – then it calls for wage moderation to re-establish competitiveness. Third, the level of labour productivity must be taken into consideration in order to preserve competitiveness. So there is no single recipe, as the situation of the individual countries differs.