A criticism sometimes leveled at inflation targeting is that the response to such supply side shocks could lead to pro-cyclicality of monetary policy. Our approach has been to try to “see through” the first round effects of such increases, and focus on the possible impact on inflation expectations and the emergence of second-round effects.
A further factor came through the repair of banks’ balance sheets from reductions in non-performing loans and improvements in capital ratios. A number of other Government interventions have had a significant influence on SME credit policy since the financial crisis.