INVESTORS are still intensely focused on inflation. The debate is now centred around 2 issues: how sticky inflation will be, and how much central banks need to tighten monetary policy to bring inflation back under control.
Some investors argue that inflation will remain at higher levels for some time and hence central banks need to take policy rates into deeply restrictive territory, even if it means that growth will decelerate meaningfully below trend.
We, however, argue that the sacrifice ratio (the amount of growth sacrifice needed to bring inflation down) is not as high as many think. We think the threshold of interest rates needed to bring inflation under control is lower than what is perceived...
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