Central banks across globe to keep focus equally on tackling inflation and growth

Interest Rate

The major economies across the world are again battling with the rise in inflation in recent months, prompting central banks to increase their focus on inflation targeting, but remain equally focused on growth.

Considering the near term risks, a few central banks have increased their projections on inflation. This includes India and the US, and the heads of these central banks are watching incoming data very closely to contain inflation and bring it back to targeted levels.

Inflation in countries such as the US and Japan, among others, have seen an uptick in recent months and remained above their central bank’s target. Whereas in India, even though CPI inflation eased it still remained above the medium-term tolerance band of India’s central bank.

Kanika Pasricha, Chief Economic Advisor at Union Bank of India said that as far as the US goes concerns over inflation may be rising in the backdrop of potential policies, such as trade tariff hikes and fiscal expansion, among others under Trump 2.0.

While, In India, Pasricha said the key area of inflation concern has been in the food sub segment, on weather related issues even as fuel and core CPI remain within the comfort zone.

The US Federal Reserve in its December policy estimated  inflation at 2.5 percent at the end of next year, up from the September median of 2.1 percent and above, where they see price growth settling at the end of this year. Policymakers now don’t expect to reach their 2 percent goal until 2027, the updated projections showed.

Similarly, Reserve Bank of India (RBI) in the December monetary policy increased the Consumer Price Index (CPI) inflation projection to 4.8 percent, up from the earlier estimate of 4.5 percent.

Despite the increase in projections, RBI in the December monetary policy said that going forward, as food price shocks wane, headline inflation is likely to ease and realign with the target as per the projections.

Pasricha added that the overall inflation framework will stay comfortable unless weather again plays spoilsport.

Similarly, US Federal Reserve Chair Jerome Powell said, “People are still feeling high prices. The best we can do for them, and that’s who we work for, is to get inflation back down to its target.”

Madan Sabnavis, Chief Economist at Bank of Baroda said both the Indian and US central banks have a different mandate while making policies. The US Fed looks after various things such as inflation, growth and unemployment numbers, whereas the RBI looks mostly at inflation.

He further added that the RBI, while making policy, would mostly consider domestic factors and not follow the US Federal Reserve in rate cuts, but would keep a close watch on that.

Both the RBI and the US Fed may stick to their mandates while making the policies, Sabnavis said.

Economists expect to see growth in most economies. In the US, growth is expected from the fiscal boost by Trump 2.0 and in India it may recover in the coming quarters.

Finance Minister Nirmala Sitharaman on Tuesday expressed confidence while speaking in Lok Sabha that India's economy will see healthy growth in the coming months, even though the second quarter's GDP numbers came in lower than expected.

India's GDP grew at 5.4 percent in the second quarter of FY25, a drop from the 6.7 per cent growth in the first quarter. “The 5.4 per cent growth rate is slower than what we anticipated. It was a challenging period not just for India but for many global economies,” Sitharaman said.