Central banking institutions, including the Reserve Bank of India, are implementing loosened monetary policies.
Central Banks Adjust Interest Rates Amid Global Economic Uncertainty
In a move to address inflation and economic uncertainties, the US Federal Reserve has paused its rate cuts, marking a halt to its easing cycle. Meanwhile, other central banks around the world have been making adjustments to their monetary policies.
The Reserve Bank of India, after a gap of five years, has lowered interest rates. Conversely, the Bank of Japan continues to increase interest rates, with short-term rates reaching 0.25% in July 2023 and further increases expected if underlying inflation accelerates towards its 2% target.
The European Central Bank (ECB) has also been active, lowering the deposit rate by 25 basis points from 3% to 2.75% and assuming that the neutral rate is likely to be between 1.75% and 2.25%. The ECB's easing measures followed a decline of 125 basis points in the ECB's deposit facility rate since last June.
In a similar vein, the Bank of England cut its key interest rate by 25 basis points to 4.5%. The Bank of Mexico made a cut of 50 bps to 9.5% this week.
Looking ahead, the Chinese central bank has announced it would cut interest rates from the current level of 1.5% "at an appropriate time" in 2025. The US Federal Reserve, on the other hand, started easing monetary rates in August 2024, with rates reduced from 5.5% to 5.4% that month. After further rate cuts in November and December 2024, the US Federal Reserve's interest rates are now at 4.5%.
The IMF has projected global headline inflation to decline to 4.2% in 2025 and 3.5% in 2026. However, the global growth rate will be below the historical average of 3.7% in both 2025 and 2026.
Notably, the US Federal Reserve announced an interest rate increase in January 2025, during a meeting held on January 28-29, 2025. Japan's central bank, on the other hand, increased short-term interest rates to 0-0.1% in March 2023.
The IMF's projections suggest a slowing global economy, with central banks around the world adjusting their monetary policies to navigate this challenging landscape. The US Federal Reserve's pause in rate cuts and the Bank of Japan's continued rate increases are indicative of this trend.
As the global economy continues to evolve, central banks will undoubtedly face more decisions about monetary policy. The IMF's projections and the actions of central banks like the US Federal Reserve, the ECB, and the Bank of Japan will be closely watched as the world economy seeks stability and growth.
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