Have central bank interest rates peaked in the US and the eurozone? If so, how quickly might they fall? From around mid-2021, central banks clearly had to tighten significantly. But what they have to do next is uncertain. Whatever central bankers might say about what they plan to do, events always have the last word. If, as many now expect, core inflation falls quickly towards their target, they will have to loosen policy. While loss of credibility is damaging when inflation gets too high, it is also so when it gets too low. A return to sub-target inflation and “pushing on a string” monetary policy would be highly undesirable. The time to respond to such risks looks close — closer than central banks admit, especially given the lags in transmission of the past tightening.

Jay Powell, chair of the US Federal Reserve, and Christine Lagarde, president of the European Central Bank, have stated their plan not to ease soon. Intervention rates have remained stable for some time: the fed funds rate at 5.5 per cent since July and the ECB’s deposit rate at 4 per cent since September. Yet Powell warned this month that the mission to return inflation to its 2 per cent target had a “long way to go”. Similarly, Lagarde told the FT last week that eurozone inflation would come down to its 2 per cent target if interest rates were kept at their current levels for “long enough”. But “it is not something that [means] in the next couple of quarters we will be seeing a change. ‘Long enough’ has to be long enough.”

A reasonable conclusion from this behaviour is that, barring surprises, rates have now peaked. But central banks simultaneously stress their plan to keep them up. One justification for publicising that intention is that it is itself a policy tool. If markets believe lower rates will come soon, they are likely to bid up bond prices, so lowering rates and easing monetary conditions. Given the uncertainty on the outlook, central banks do not wish today’s tight financial conditions to be undermined in that way. They would prefer to preserve them until certain that their economies do not need them any more.