Higher interest rates and lower long-run growth more likely than permanently higher inflation – Nomura

Central banks and most economists are forecasting inflation will broadly return to 2% at the end of their forecast horizons. But will it? Economists at Nomura share their thoughts.

Will inflation settle at 2%?

“There may be tail risks of inflation settling at higher than 2% in both the medium and long term, although for now, this is not our base case.”

“In the medium term, labour markets may remain sufficiently tight and inflation expectations may prove to be stubbornly high. In the long term, we think the climate transition, demographic challenges and de-globalisation will make achieving 2% inflation increasingly challenging.”

“Central banks have a 2% inflation target. Does that mean these targets go out of the window? We don’t think so. A 2% target is essential to maintain the credibility of central banks.”

“Instead of entering a world of permanently higher inflation, we believe we are more likely to enter a world of permanently higher interest rates and lower long-run growth.”