If the central bank’s reaction function is understood by the public and the markets and if its monetary policy enjoys credibility, the interest rate path expected by the market will mostly be consistent with the envisaged inflation target.
However, if new economic shocks arise, it can be extremely difficult to communicate necessary deviations of the monetary policy stance from the interest rate path anticipated in this way. This can place an undue restriction on the ability of monetary policy to react in a timely manner to changes in economic conditions and in risks to price stability.