Are money changers capable of influencing inflation rates?
Central Banks Adopt Divergent Strategies to Address Inflation in 2025
In 2025, the European Central Bank (ECB), Federal Reserve (Fed), and Bank of Japan (BoJ) have each taken distinct approaches to combat low or moderating inflation, reflecting their unique economic contexts and strategic priorities.
European Central Bank (ECB): The ECB has pursued an aggressive easing cycle, implementing eight consecutive rate cuts since early 2024, bringing the deposit facility rate down to 2.00% by mid-2025. This easing aims to stimulate eurozone consumption and investment amid easing inflation pressures now aligned with its 2% target. The ECB's dovish stance contrasts with global counterparts and has contributed to a weaker euro, boosting exports but increasing import costs.
Federal Reserve (Fed): The Fed has adopted a more cautious "wait-and-see" stance, keeping the federal funds rate steady at around 5.25% since March 2025. This reflects persistent inflation above target. While earlier in 2024 the Fed began a rate-cutting cycle, its current pause indicates uncertainty about inflation dynamics and the labour market.
Bank of Japan (BoJ): The BoJ remains the most dovish, holding its benchmark rate at an ultra-low 0.5% through July 2025 despite rising core inflation forecasts and modest GDP growth expectations. The BoJ’s gradual tapering of bond-buying and continued low rates contrast markedly with Fed and ECB policies, contributing to yen depreciation and influencing global capital flows via carry trades.
These divergent strategies reflect each central bank's mandate interpretation and economic reality. The ECB focuses on easing to meet growth and inflation goals, aiming to stabilise inflation at its 2% target amid economic headwinds. The Fed cautiously manages a delicate inflation slowdown, acknowledging that inflation remains "persistent" above target. The BoJ maintains an accommodative stance to foster a sustainable inflation uptrend without destabilising markets, due to long-standing structural deflationary challenges.
These differences reshape global markets by influencing capital flows, exchange rates, and asset valuations differently. The ECB's dovish easing strengthens eurozone equities and corporate bonds demand. The Fed’s pause signals market uncertainty about inflation trajectory, while the BoJ’s low-rate policy widens the yen carry trade, increasing volatility risks.
Central banks may face challenges in the coming years if the commodity price cycle gains momentum and inflation persists above average targets. Jerome Powell, the Fed chair, is reassuring markets and the public that the current inflation increase is only "temporary." The ECB, under Jean-Claude Trichet, achieved an average overall inflation rate of 1.97% in the first twelve years of the euro's existence. Consumer price inflation in the United States rose to 5.4 percent in June.
The ECB, Fed, and BoJ each face unique challenges in achieving their inflation targets. The ECB has shifted to a symmetric target of about 2 percent inflation in the medium term and is maintaining its ultra-loose monetary policy, including the use of negative interest rates. The Bank of Japan (BoJ) might need to review its monetary policy strategy due to consistently failing to achieve its 2% inflation target. Neither the Fed nor the ECB have provided answers to the question of why inflation remains low despite significant monetary efforts. Both the ECB and the Fed reaffirm their view that they can keep inflation close to 2% forever. Before the introduction of the euro in 1999, the ECB Council defined its mandate as maintaining an inflation rate below 2% for the euro area. The ECB has considerable leeway in shaping its monetary policy, as the EU Treaty states that the primary objective is to maintain price stability without defining what that means.
Investing in eurozone equities and corporates may prove favorable in 2025, given the European Central Bank's (ECB) aggressive easing cycle aimed at stimulating consumption and investment. In contrast, the Federal Reserve's (Fed) cautious stance on interest rates, intended to manage persistent inflation above target, could signal market uncertainty about the inflation trajectory. Meanwhile, the Bank of Japan's (BoJ) ultra-low interest rate policy, focusing on fostering a sustainable inflation uptrend, widens the yen carry trade and increases volatility risks.
