The global economy is completing quite a successful soft-landing. There are not many historical records of periods of global monetary tightening, along with widespread interest rate hikes, which had been highly successful in lowering inflation without causing a significant rise in unemployment or deterioration in economic activity. As per Kavan Choksi, the global interest hikes that were applied in 2022 and 2023 managed to return inflation to acceptable levels eventually. In fact, it already is heading towards the 2% target in the United States and Eurozone. This is achieved with the world growing at around 3% in 2024, which is a reasonable level of growth under the circumstances.
Kavan Choksi sheds light on easing inflation pressures across the world
2025 started with the world being at an advanced stage of interest rate cuts, low unemployment levels, sustained growth and declining inflation levels. The United States economy is on a solid growth trajectory. Strong productivity momentum, robust consumer spending, as well as healthy employment and income growth are some of the major factors that are helping tame inflationary pressures in the nation. These positive dynamics are likely to carry into 2025, and allow the Fed to pursue a gradual and cautious policy re-calibration.
On the other hand, Europe is in a timid cyclical recovery, with very different realities experienced by countries in the south and the north. Growth is strong in the south, particularly in Spain. On the other hand, Germany, which represents 30% of the region’s GDP is struggling with structural issues. Inflation is likely to steadily converge toward central bank targets across regions, with upside risks stemming from volatile commodity prices, geopolitical tensions and structural supply fragilities.
In many advanced economies where inflation had reached multi-decade highs following the pandemic, price pressures are likely to moderate but stay uneven. Potential tariffs, wage cost pressures and limited innovation undermining global competitiveness in particular sectors may persist across the United Kingdom and European economies. A moderating trend in inflation is likely to remain in the United States through 2025. As per Kavan Choksi, emerging markets are likely to grapple with the challenge of curbing inflation while dealing with foreign exchange fluctuations, volatile commodity prices and fragile supply chains. Multiple emerging economies, including Indonesia and India, are well-positioned to maintain price stability owing to monetary prudence and proactive fiscal measures.
In the near term, easing inflation would continue to favour monetary policy re-calibration. However, even though central banks would find several reasons for pursuing their policy easing cycle, they would also re-calibrate with caution. This caution especially has to be maintained due to risks from inflation volatility tied to energy, wages, trade and food cost pressures.
The Federal Reserve is expected to take a cautious approach to policy easing subsequent to lowering the federal funds rate by 100 basis points (bps) in 2024. With uncertainty surrounding the neutral rate, data-driven policymakers may choose to favour easing at alternate Federal Open Market Committee (FOMC) meetings through the third quarter of 2025. A prolonged pause in the easing cycle remains a distinct possibility, and the potential for a Fed rate hike in 2025 cannot be ruled out.