2025 Inflation Battle: Central Banks Brace for Extended Rate Hikes with Fed Targeting 5.5%+
In 2025, U.S. and European central banks anticipate a prolonged and intensified struggle against inflation, signaling extended periods of higher interest rates to stabilize overheated economies.
Central Banks Prepare for a Prolonged Inflation Fight Amid Strong Economic Growth
At the beginning of 2024, market expectations suggested the Federal Reserve was nearing the end of its rate-hiking cycle. However, recent developments have shifted this outlook dramatically.
Federal Reserve officials, along with their counterparts at the European Central Bank (ECB) and Bank of England (BOE), now indicate that combating persistent inflation will require maintaining elevated interest rates longer than initially projected. February's economic data revealed inflation and economic activity running hotter than anticipated, prompting a reassessment of monetary policy strategies.
Higher interest rates are expected to place increased financial pressure on both consumers and businesses, tightening budgets across the board.
According to the CME FedWatch tool, markets currently expect the Fed's benchmark federal funds rate to rise to a range between 5.25% and 5.5%, or potentially even higher, marking a notable shift from earlier predictions.
Christopher Waller, a Federal Reserve governor and policymaker, acknowledged in recent remarks that the influx of data has challenged earlier optimism about progress in cooling inflation and moderating economic growth.
Deutsche Bank economists have echoed this sentiment, projecting the Fed will continue rate hikes until reaching between 5.5% and 5.75%—levels not seen since 2001—reflecting a more hawkish stance in recent communications.
Similarly, Bank of England officials report the UK economy is performing stronger than expected, with BOE Chief Economist Huw Pill highlighting this in a recent speech.
Meanwhile, ECB representative Pierre Wunsch indicated the possibility of raising interest rates to as high as 4%, which would be a significant increase from current levels, to tackle persistent inflation within the European Union.
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