Financial institutions regulating price increases?
Central banks around the world, including the European Central Bank (ECB), the US Federal Reserve, and the Bank of Japan (BoJ), are reassessing their monetary policy strategies in response to prolonged low inflation, evolving economic conditions, and the need to strike a balance between growth and price stability.
The ECB, for instance, is maintaining a cautious, data-dependent approach amid persistent low inflation in the Eurozone. In July 2025, the ECB held the deposit facility rate steady at 2.00%, but market expectations suggest a 30 basis point cut by year-end to around 1.70%, signaling easing to support inflation recovery. The ECB's strategy review aims to respond flexibly to subdued inflation and uncertain trade conditions, seeking to stimulate the economy without destabilizing markets [1][4].
On the other hand, the US Federal Reserve is maintaining its benchmark rate at 4.5% and adopting a "wait-and-see" stance. Inflation is gradually cooling but still not fully anchored, and the labor market remains strong. The Fed's review focuses on assessing the effects of previous rate hikes, balancing the risk of overtightening with the need to contain inflation. Future rate cuts are expected cautiously, influenced by trade uncertainties and inflation risks from tariffs [2][3].
The BoJ is gradually tightening policy by raising its benchmark rate from 0.5% to 0.75%, marking a cautious shift away from its long-standing ultra-loose policy. This reflects rising inflation above its 2% target and stronger wage growth, prompting the BoJ to normalize rates carefully to maintain price stability while supporting a sustainable economic recovery [1][3][4].
The ECB's primary objective, as stipulated by the EU Treaty, is to maintain price stability. Before the introduction of the euro in 1999, the ECB's mandate defined price stability as a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below 2%. In 2010, under the tenure of then-ECB President Jean-Claude Trichet, the average overall inflation rate in the eurozone was 1.97% [5]. Currently, the European overall inflation rate is reaching the ECB's target of 2% in the medium term.
The ECB adjusted its target in 2003, aiming to maintain inflation rates below, but close to, 2% over the medium term. Similarly, the Federal Reserve has shifted to an average inflation target of 2% and has announced that it may have to tighten interest rates for an extended period due to a rise in consumer price inflation to 5.4% in June. However, the ECB does not set an average inflation target of exactly 2% like the Fed, but still views it as an achievable goal [6].
The low inflation rates over the past decade can largely be attributed to falling commodity costs, which benefit consumers worldwide. Central banks, including the ECB and the Fed, may continue to engage in excessive monetary easing as they overestimate their control over inflation figures and trends. However, it is crucial for these central banks to investigate the reasons behind the decrease or increase in inflation rather than solely focusing on inflation numbers.
In the coming years, central banks may face challenges if the commodity price cycle gains momentum and inflation remains persistently above average inflation targets. Jerome Powell, the Fed Chair, has stated that the current inflation increase is temporary. Nevertheless, central banks should remain vigilant and adapt their strategies as necessary to maintain price stability and support economic growth.
References:
[1] ECB (2025). Monetary Policy Statement. [2] Fed (2025). FOMC Statement. [3] BoJ (2025). Monetary Policy Meeting Outcome. [4] ECB (2025). Strategy Review Report. [5] Eurostat (2010). Harmonised Index of Consumer Prices (HICP). [6] ECB (2023). Inflation Report.
The ECB is examining potential investments in bonds, aiming to stimulate the economy and support inflation recovery. In the realm of finance, this strategy is an example of central bank's involvement in investing.
The strategy of the Federal Reserve and other central banks, like the ECB, often involves manipulating interest rates, which is a key aspect of bank finance and investing. This adjustment is aimed at balancing growth and price stability in response to changing economic conditions.
