New Delhi: As the world recovers from the pandemic and geopolitical upheavals, 2025 is a crucial year for global macroeconomic management. Globally, inflation was high, but it has since significantly declined. Following their harsh tightening policies in 2022–2023, central banks are now adopting a more cautious stance.
This article explores the shifting dynamics of interest rate and inflation cycles in major economies, the policy conundrums central banks face, and the effects on financial markets and global growth.
Inflation trends: From crisis to control
Due to supply chain disruptions, energy price surges, and significant fiscal stimuli, global inflation peaked in 2022 at about 9 percent. Inflation has drastically declined by late 2024 and into 2025.
- It is anticipated that global consumer price inflation would average 3.8 percent in 2025, a decrease from 6.8 percent in 2023.
- Because of a tighter monetary policy, reduced commodity prices, and normalised supply chains, inflation has declined to the 2.5–3.5 percent level in developed economies including the United States, the Eurozone, and the United Kingdom.
- Emerging markets have diverse trends: Russia and Turkey continue to experience high inflation as a result of currency devaluation and fiscal imbalances, while Brazil and India have inflation within target ranges levels (4–5 percent).
- With a CPI of -0.3 percent in early 2025, China notably entered a mild deflation due to weak domestic demand and excess industrial capacity.
Key drivers of decreasing inflation
- Supply Chain: Supply chain networks have recovered to their pre-pandemic levels in terms of shipping prices and delivery timeframes.
- Monetary tightening: Rate increases in 2022–2023 have slowed the growth of credit and demand.
- Energy price stabilisation: Since oil and gas prices have dropped from their 2022 highs, input costs have declined.
- Base effects: Year-over-Year comparisons have statistically moderated due to prior high levels of inflation.
Global shift in interest rate cycles
As inflation declined and worries about growth grew, central banks began lowering interest rates in the latter half of 2024. This change contrasts with the synchronised tightening observed during the preceding two years.
Table 1 – Region/Country Policy Interest Rates and Trends | ||
Region/Country | Policy Rate (October/November 2025) | Reason and Trend in 2025 |
U.S. (Federal Reserve)* | 3.88% | Reduced by 100 bps since May 2024 |
Eurozone (European Central Bank) | 2.00% | Maintaining an easing bias |
UK (Bank of England) | 4.00% | Gradual rate cuts |
Japan (Bank of Japan) | 0.50% | Minimal changes, accommodative stance |
India (Reserve Bank of India) | 5.50% | Inflation within target range, hence steady policy rate |
Brazil (Banco Central do Brasil) | 15.00% | The rate was kept unchanged at the November 2025 – Copom meeting. |
Russia (Bank of Russia) | 16.50% | Tightened due to inflation risks |
* – Mid-point of policy range (Range is 3.75% to 4.00%)
Source: Bank of International Settlement (BIS) Central Bank Policy Rates Data, BIS website.
The change was spearheaded by the U.S. Federal Reserve, which has lowered interest rates by 100 basis points since May 2024. Aware of the ongoing core inflation in housing and services, the Bank of England and the European Central Bank also made moderate cuts.
Policy challenges and actual rates
Real interest rates have turned positive in many economies, tightening financial conditions without additional rate hikes, since inflation is declining more quickly than nominal interest rates.
The central bank must perform a careful balancing act — rates that are cut too slowly could hinder growth, investment, and credit recovery; rates that are cut too quickly run the risk of rekindling inflation, especially in services and salaries.
The IMF and BIS have cautioned against premature easing, particularly in economies where core inflation remains stubborn. Data-driven flexibility is increasingly more important to central banks than strict forward guidance.
Financial situation and market impact
Market reactions:
Bond yields have decreased, resulting in steeper yield curves in the U.S. and EU. Equities surged in early 2025 on expectations of lower rates and improved earnings. Currencies have varied, with the U.S. dollar weakening slightly and emerging market currencies strengthening due to carry trade flows and improved fundamentals.
Financial Conditions Index (FCI)
FCI has eased in the U.S. and Eurozone since Q2 2024, supporting credit expansion. Japan and China have loose conditions but are ineffective due to weak demand. Russia and Turkey face tight conditions due to inflation and geopolitical risks.
Global growth and inflation
Global GDP growth is forecasted at 2.9 percent in 2025, slightly below the long-term average. Advanced economies are expected to grow at 1.5–2.0 percent, constrained by tight labour markets and fiscal adjustments. Emerging markets are projected to grow at an average of 4.5–5.0 percent, led by countries like India, Indonesia, and Vietnam.
Inflation moderation has allowed for policy easing, but challenges like aging populations, climate transition costs, and geopolitical tensions limit the upside potential.
Conclusion: Moving towards a new monetary landscape
The global economy in 2025 is evolving, and it looks like it’s finding a new financial balance due to the major shifts after the pandemic and international conflicts. As central banks reassess their plans, they are accepting that neutral interest rates could establish at levels higher than those of the pre-Covid period.
This adjustment reflects enduring forces such as deglobalization, expansive fiscal commitments, and the capital-intensive demands of climate transition.
Even though inflation targeting is still the main focus of monetary policy, policymakers are showing more flexibility by allowing inflation to briefly exceed targets, especially when supply chain issues or climate-related events are the cause.
A more practical, data-driven approach is replacing the strict traditions of yesteryear, and it finds a balance between trustworthiness and adaptability.
However, the path ahead is not without risk. Geopolitical tensions in Eastern Europe and the Middle East continue to cast a shadow over energy markets and global trade flows.
Erratic climate could hinder crop yields and supply networks, with the possibility of reviving inflation.
In addition, substantial public debt in developed nations might restrict the ability to use fiscal policy and thus limit economic stabilization measures.
Despite these challenges, the prevailing macroeconomic environment —characterized by easing inflation and cautious monetary loosening — offers a chance for progress.
If central banks can navigate this delicate phase with prudence and coordination, they may lay the foundation for a more stable and resilient global financial system.
These upcoming quarters will be critical for determining the path of interest rates and reshaping the framework of international economic policy.
