• The terminal rate for policy is linked to the structural, or underlying, forces acting on the economy once the business cycle has played out—that is r*;

• The cyclical peak rate, meanwhile, is the rate that will have to be attained over the next 1-2 years or so to tame inflation;

• We discuss the cyclical and structural forces that will impact rates in the decade ahead, estimating possible policy rate adjustment in the US, UK and Eurozone.

THIS WEEK’S European Central Bank (ECB) conference in Sintra, Portugal, saw key policymakers—Bailey, Lagarde and Powell—reiterating their strong determination to overcome the challenge of high inflation. At the same time, it was suggested that even once under control, we are unlikely to return to the lowflation experienced over the past decade—that we are in a new inflation regime.

Indeed, President Lagarde was quoted as reflecting that: “There are forces that have been unleashed as a result of the pandemic [and] as a result of this massive geopolitical shock that are going to change the picture and the landscape within which we operate.” This includes the reversal of globalisation’s network of supply chains in favour of more proximate, friendly “trading blocks.”

More generally, from the perspective of thinking through the rates path from here, there are two issues of relevance.

• The first is the cyclical peak to which rates will have to be adjusted over the next year or so (the peak rate) in order to tame inflation.

• The second is the structural, or underlying, forces acting on inflation once this business cycle has played out (the terminal rate).

It is the latter, the terminal rate, at which Lagarde was hinting. The former, peak rate, is of most relevance for rates over the next 6-18 months.

What can be said about the terminal and the peak rate at this time? Back in the first quarter, we outlined for Exante Data clients a framework for thinking through where the peak rate might move during this cycle, and where the terminal rate might eventually fall. What is most surprising with hindsight is the speed with which the predictions outlined then came to be priced in.