The inflation that has gripped the world over the past few years has had a profound impact on all of our lives. Pandemic disruptions to supply chains, the outbreak of the Russian-Ukrainian war, and aggressive fiscal policies around the world have pushed prices out of control. The global economy has been hit hard, with soaring prices eroding real incomes and businesses suffering from rising production costs. To combat this inflation, central banks have tightened their belts by steeply raising interest rates. But now we’re at a critical crossroads. Is the end of inflation in sight? Or will the period of high interest rates last longer than expected, and will central banks be able to achieve their goal of price stability? Today, we’ll explore the answers to these questions and dive deeper into the future of global monetary policy.
sticky inflation: slower decline than expected
Central banks around the world typically target inflation at 2%, but as of May 2025, the U.S. consumer price index (CPI) was up 2.4% year-over-year(Bureau of Labor Statistics CPI Summary – May 2025 , NYSUT Consumer Price Index May 2025), while the Eurozone’s CPI was up 1.9% in May, close to target(European Commission Annual Inflation May 2025 , Trading Economics Euro Area Inflation Rate). While this represents a significant decline from the peak, upward pressure on service prices and wages remains high and is the main factor slowing the pace of inflation decline. Volatility in energy prices, geopolitical risks, and supply chain instability due to climate change also remain potential risks that could reignite inflation.
The dilemma for major central banks: cut or hold?
Central banks in major economies are facing a complex dilemma. While price stability is a top priority, there are growing concerns that a sharp rate hike could trigger a recession.
- US Federal Reserve (Fed): the Fed remained cautious at its June 17-18, 2025 FOMC meeting, keeping its benchmark interest rate unchanged at 4.25% to 4.50%(Equals Money – Fed Interest Rate Decision, TheStreet – Fed official predicts when to expect interest rate cuts). Fed officials expect two 25 basis point rate cuts in the second half of 2025, but the timing of the cuts could be delayed if inflation data is firmer than expected or the labor market overheats(The Economic Times – US Fed meeting June 2025).
- European Central Bank (ECB): On June 5, 2025, the ECB became the first major central bank to cut its three key interest rates by 25 basis points, bringing the deposit rate to 2.00%, the main refinancing rate to 2.15%, and the marginal lending rate to 2.40%(European Central Bank Monetary Policy Decisions June 2025). This was interpreted as a reflection of the eurozone’s slowing economy and inflation being close to the 2% target. However, the ECB emphasized that it will not predetermine the path of future rate cuts and will be data-driven.
- Bank of England (BOE): the Bank of England kept its benchmark interest rate at 4.25% at its Monetary Policy Committee (MPC) meeting on June 18, 2025(Bank of England Monetary Policy Summary June 2025, Equals Money – BOE Interest Rate Decision). This is the level it has been at since it was cut by 25 basis points in May. Opinion was split on a further cut, with six MPC members voting to keep rates unchanged and three arguing for a 25 basis point cut. Markets expect the Bank of England to start cutting rates further in the second half of this year.
- Bank of Japan (BOJ): the Bank of Japan kept its policy rate unchanged at 0.5% at its June 17, 2025 monetary policy meeting(Investing.com Japan Interest Rate Decision, Equals Money – Bank of Japan Interest Rate Decision). This is the level it has been at since January 24, when it was raised from 0.25% to 0.5%. While the Bank of Japan is gradually moving away from ultra-accommodative monetary policy, it is expected to make further policy adjustments while keeping a close eye on the stable achievement of its inflation target of 2%. Analysts believe the next rate hike is likely to come in late 2025 or early 2026.
The shadow of prolonged high interest rates: the impact on the global economy
If the high interest rate environment lasts longer than expected, there are a number of expected impacts on the global economy, including
- Slower economic growth and possible stagnation: Higher interest rates will act as a deterrent to business investment and household spending, slowing economic growth. Businesses and households with high levels of debt may suffer from increased interest burdens.
- Increased financial market volatility: Higher interest rates can reduce the attractiveness of equity markets and increase bond market volatility. They can also increase currency value volatility, which can affect international capital flows.
- Increase the vulnerability of emerging economies: Prolonged high interest rates in advanced economies could intensify capital outflows from emerging economies and cause the dollar to strengthen, which could increase the burden of debt service in emerging economies. This contributes to greater instability in emerging economies.
- Increased government debt burden: Higher interest rates can increase the interest payment burden on governments, worsening their fiscal position. This can act as a constraint on the government’s fiscal space in the long run.
Achieving price stability targets: the unfinished business
Achieving central banks’ price stability objectives remains a major challenge. This is because there are still variables that are difficult to control, such as energy prices, geopolitical risks, and unexpected supply chain shocks. It is also important to consider that we are entering a “new normal” era, which could lead to different inflation dynamics than in the past. For example, globalization and geopolitical realignments could increase production costs, which could lead to higher inflationary pressures in the long run. While advances in new technologies, such as artificial intelligence (AI), can contribute to price stability by increasing productivity, they can also create new forms of demand, which can create inflationary pressures. Central banks are challenged to analyze these complex factors closely and adjust policy flexibly.
Inflation dynamics, in simple terms, refers to the principles and complexmechanisms of how inflation arises, changes, and persists. It is more than just the phenomenon of rising and falling prices; it analyzes the interaction of the various factors behind it and how they change over time.
Conclusion: In times of uncertainty, central banks need to choose wisely
The future of global inflation remains uncertain, with central banks struggling to strike a balance between price stability and avoiding recession, which is no easy task. So far, indicators suggest that inflation has peaked and is on the decline, but it remains above central banks’ targets, raising the possibility that the high-interest rate environment could last longer than expected.
In conclusion, it is still too early to declare a complete end to global inflation. Central banks will keep a close eye on the economic indicators that will be released in the coming days and will make monetary policy decisions carefully: a sharp rate cut could trigger a recession, while a rate cut that comes too late could re-stimulate inflation. We must remember that in this complex situation, the wise choices made by central banks will have a decisive impact on the stability of the global economy. In the coming years, we will experience economic repercussions, large and small, depending on the decisions made by central banks. While it is difficult to predict the future of the global economy, what is clear is that the role of central banks has never been more important. Continued attention and analysis will give them the wisdom to respond wisely to the changing economic landscape.
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