Although the “rate of potential output growth’ and “the neutral interest rate” are critical for evaluating the need for policy adjustment, they are model-based concepts and neither are observable. This means that policy makers often need to “feel their way” through an interest rate tightening phase, especially given uncertainties around the lags before policy adjustments affect inflation and output.
Global forces can have an enormous influence on inflation and other relative prices such as exchange rates and interest rates.