Central banks have the last laugh

They've tamed record inflation without triggering a recession whether through tactical genius or sheer luck is anybody's guess

- T T RAM MOHAN

The world economy will grow at 3.2 per cent in 2024 and 2025, says the International Monetary Fund's (IMF's) latest Economic Outlook. That is below the 3.6 per cent growth rate seen during 2006-15. Yet, the relief over the growth projections is almost palpable.

There is relief because the battle against record levels of global inflation has been won - or so the IMF declares - without as much loss of growth as was feared. Inflation rates are trending down without the global economy going into recession. Commentators who had been critical of central banks' responses to post-Covid inflation have been proved wrong.

Global inflation peaked at 9.4 per cent year-over-year in the third quarter of 2022. In the US, the inflation rate rose to 9.1 per cent in June 2022. Since then, inflation rates have been dropping. Global headline inflation is now projected to reach 3.5 per cent by the end of 2025, below the average level of 3.6 per cent between 2000 and 2019.

As inflation started surging after the Covid-19 pandemic, central banks were roundly criticised for tightening too little and too late. Since central banks were slow to react, critics said, monetary tightening would have to be extremely aggressive. A soft landing was almost impossible.

Central banks have also been faulted for being slow to loosen monetary policy when the inflation rate began to decline, and growth was seen to be faltering. Might they have done anything differently? Since the actions of central banks were broadly synchronised, let us focus on the actions of the US Federal Reserve.

The pandemic was correctly seen as giving rise to a supply shock as well as a demand shock. Monetary (and fiscal) policies to boost demand were entirely appropriate. Expansionary policy caused the inflation rate in the US to rise above the target rate of 2 per cent in March 2021.