Inflation to undershoot central banks’ targets, keeping both policy rates at low levels – Handelsbanken

Handelsbanken’s main scenario is that the powerful disinflationary trends will persist, with inflation continuing to undershoot central banks’ targets for a sustained period. The challenge for monetary policy is thus likely to be avoiding deflation, rather than the reverse. However, a post-COVID-19 era of above-target inflation cannot be ruled out.  

Key quotes

“Pressure from low demand and high unemployment in large parts of the world is contributing to keeping a lid on wage inflation, and we expect inflation to be subdued in most parts of the world over the next few years. In the longer-term, different factors will pull in different directions. A post-pandemic era of both deflation and above-target inflation cannot be ruled out.”

“There are many arguments for higher inflation in the coming decade.  Central banks explicitly intend to let inflation overshoot their targets.  Deglobalisation and ageing population. A prolonged period of combined fiscal and monetary stimulus. Consumption boom.”

“The pandemic may well reinforce the disinflationary trend we have seen in recent decades. Digitalisation boost from pandemic. Disinflationary expectations. A prolonged period of higher precautionary savings. Fiscal austerity in the medium term (2022-24).”