As 2025 progresses, central banks around the world remain in the spotlight, navigating the delicate balance between curbing inflation and supporting economic growth. After years of volatility stemming from the COVID-19 pandemic, supply chain disruptions, geopolitical tensions, and energy price shocks, inflation management has become both more urgent and more complex. So how are central banks responding?
1. Higher for Longer: The New Normal
The phrase “higher for longer” has become a common refrain among central bankers this year. Many institutions—including the U.S. Federal Reserve, the European Central Bank (ECB), and the Bank of England—are maintaining relatively high interest rates even as inflation slows. The reason? A cautious approach to avoid reigniting price pressures.
Jerome Powell, Chair of the Federal Reserve, has emphasized the importance of not cutting rates too quickly. “Premature easing could undo the progress we’ve made,” he stated earlier this year. Most central banks are signaling that any future rate cuts will be gradual and data-driven.
2. Targeting Core Inflation
Headline inflation, which includes volatile food and energy prices, has fallen in many regions, but core inflation—stripping out those volatile components—remains sticky. Central banks are now focused on this more persistent type of inflation, particularly in services, housing, and wages.
Christine Lagarde, President of the ECB, noted in a recent address: “We need to see a sustained decline in core inflation before making any decisive moves on monetary policy.”
3. Currency Management and Global Coordination
In a globally interconnected economy, currency fluctuations can influence inflation. A weaker currency can increase the cost of imports, fueling domestic inflation. To counter this, some central banks are using interest rate policies and foreign exchange interventions to stabilize their currencies.
Additionally, there has been more international coordination than in previous decades. The G20 finance ministers have engaged in regular discussions to ensure that national inflation-fighting efforts do not have adverse spillovers on other economies.
4. Supply-Side Support
Central banks are increasingly working alongside governments to address the root causes of inflation. While monetary policy tackles demand, supply-side issues—like energy shortages, housing constraints, and labor market mismatches—are being addressed through fiscal and structural reforms.
In countries like Canada and Australia, central banks have supported government measures to boost housing supply and invest in infrastructure, helping reduce some long-term inflationary pressures.
5. Communication and Credibility
Finally, central banks in 2025 are placing a strong emphasis on clear, transparent communication. Forward guidance, press conferences, and published minutes have become crucial tools in shaping market expectations and maintaining policy credibility.
Clear messaging helps anchor inflation expectations—a critical component in preventing inflation from becoming self-fulfilling. As inflation becomes more responsive to psychology and perception, central banks are as much managing expectations as they are interest rates.
Conclusion
In 2025, steering inflation requires a multi-faceted approach. Central banks are blending traditional tools with new strategies, balancing caution with clarity. While inflation has cooled from its peaks, the fight isn’t over—and central banks remain vigilant, adaptive, and in the driver’s seat.
Published: 17th July 2025
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