In recent years the global economy has faced unprecedented challenges. The COVID-19 pandemic, geopolitical tensions, and extreme weather events have led to global shocks, disrupting supply chains and causing a sharp increase in energy and food prices. In response, central banks were forced to reconsider their monetary policy, resulting in significant tightening of credit conditions.
According to the IMF’s “World Economic Outlook, October 2024”, inflation peaked in the third quarter of 2022 reaching an average annual rate of 9.4%. By the end of 2025 inflation is expected to decline to 3.5%, below the pre-pandemic average of 3.6% observed from 2000 to 2019. This disinflation process resulted from a combination of measures and contributing factors.
Monetary policy played a key role in reducing inflation. Central banks in advanced economies began to tighten policy simultaneously. By mid-2023 most central banks had stopped raising rates, but real interest rates continued to rise due to declining inflation expectations. Real rates exceeded natural levels, helping to cool economic activity and bring inflation under control.
The report notes that the disinflation process in advanced economies came at a relatively low cost to employment. This was due to the improvement in labor supply, supported by migration flows. Nominal wage growth, although remaining above pre-pandemic levels, did not lead to a wage-price spiral similar to that of the 1970s. Monetary policy measures aimed at anchoring inflation expectations helped keep inflation under control.
Central bank rate hikes led to a significant increase in mortgage and bank loan rates. This, in turn, slowed private lending and investment, reducing aggregate demand. However, despite the monetary policy tightening, fiscal policy in many countries remained relatively loose. The IMF highlighted delays in implementing fiscal consolidation plans between 2022 and 2024.
The situation in the United States is particularly noteworthy, where the level of government spending remained high. This contributed to the strengthening of the US dollar. For developing countries, this complicated borrowing conditions as debt servicing costs continued to rise. In the euro area, significant rate cuts of 100 basis points were expected in 2024, followed by 50 basis points in 2025, bringing the rate down to 2.5% by mid-2025. This contrasts with the Bank of Japan’s continued rate hikes to maintain inflation expectations near the target level.
Emerging economies continued to face inflationary pressure. Rising food prices had a significant impact on domestic markets and inflation expectations. The report highlights that countries like China faced economic growth slowdowns, posing risks to global financial stability.
The main lesson from the recent inflation episode is the importance of a balanced approach. Monetary policy tightening helped contain inflation. However, as rates begin to decline, governments need to focus on stabilizing debt obligations. This will create the necessary fiscal reserves for the future. Excessive fiscal tightening could lead to an economic slowdown, which would be counterproductive.
The future of the global economy remains uncertain. Global growth is forecasted at 3.2% in 2024 and 2025 which is below pre-pandemic averages. The IMF warns that new shocks, including geopolitical tensions and renewed inflationary pressure, could alter the current forecast. The report also emphasizes the need for structural reforms. Without their implementation, long-term growth will remain sluggish, and fiscal stability will be at risk.
The conclusions are clear: the monetary policy measures of recent years have demonstrated the importance of coordination and flexibility. They helped avoid a global recession and brought inflation back to acceptable levels. However, for long-term stability, further strategic steps are needed, focusing on reforms and maintaining a balanced fiscal policy.
Prepared by: Alen Serik, expert of the Economy KZ portal
