Restrictive Territory

Restrictive territory describes a monetary policy situation in which the measures taken by a central bank have the effect of slowing economic growth. However, these monetary policy measures in the form of interest rate hikes are necessary because the inflation rate in the country has risen too sharply and, in order to bring it down again to normal levels, main interest rates have to be raised.

In a restrictive territory situation, a decline in economic growth due to several interest rate hikes is seen as the lesser evil compared with the excessively high inflation rates which would instead have negative long-term consequences for the economy, the labour market and the prosperity in general. The damage triggered by the interest rate increases is more likely to be seen as short-term in a restrictive territory situation.