Even as inflation has receded and policy restriction has been dialled back, current market prices suggest that maintaining price stability will require higher real interest rates in the future than before the pandemic.

In my remarks today, I will argue that the shift in market expectations about the level of r* – the rate to which the economy is expected to converge in the long run once current shocks have run their course – is consistent with two sets of observations.

The first is that the era during which risks to inflation have persistently been to the downside is likely to have come to an end.

Growing geopolitical fragmentation, climate change and labour scarcity pose measurable upside risks to inflation…