Inflation & Interest Rates

• Inflation Trends: The International Monetary Fund (IMF) forecasts a decrease in global headline inflation, expecting it to fall to 4.2% in 2025 and further to 3.5% in 2026.

  IMF This decline is attributed to unwinding supply-side issues and restrictive monetary policies. Advanced economies are projected to see a quicker convergence to target inflation rates compared to emerging markets.

   

• Central Bank Policies:

  • Federal Reserve (Fed): The Federal Open Market Committee (FOMC) is currently holding a two-day policy meeting, with expectations to maintain the federal funds rate at 4.25% to 4.5%. Future rate cuts are anticipated, with projections indicating two additional cuts in 2025, bringing the rate down to 3.4% by 2026.

    Yahoo Finance

     

  • Bank of Japan (BoJ): In 2024, the BoJ ended its negative interest rate policy and raised its target rate to 0.25%. Further rate hikes are possible, reflecting a shift towards policy normalization.

    ING Think

     

  • Bank of England (BoE): Facing a contracting economy, the BoE is under pressure to consider easing monetary policy. Despite internal discussions advocating for rate cuts, the BoE has maintained rates at 4.5%, with potential cuts anticipated later in the year.

    Reuters

     

• Cost of Living and Wage Growth: The decline in inflation rates has not uniformly translated into reduced cost of living pressures. Wage growth varies across regions, with some economies experiencing stagnant wages despite lower inflation. Central banks are challenged to balance controlling inflation while supporting wage growth and overall economic recovery. The OECD notes that increasing U.S. tariffs could slow global economic growth and boost inflation, potentially impacting household incomes and wage dynamics.

  WSJ

   

In summary, as inflation trends downward, central banks are navigating complex decisions on interest rates to foster economic stability, considering the nuanced impacts on cost of living and wage growth across different economies.

Global Economic Updates: Inflation, Tariffs, and Central Bank Policies