Real interest rates

Inflation in the world economy is 4.1% (2025), versus 5.8% a year earlier. The dollar pushes on import costs; demand relative to trend, steered by interest rates, sets domestic pressure. Expectations and wages decide whether it sticks, and that is what the central bank responds to.

Over the past 12 months the dollar gained 0.3% on average against 8 major currencies. Because oil, food and much cross-border debt are priced in dollars, a stronger dollar raises costs for the rest of the world and tightens global financial conditions; a weaker one eases them.

The median policy rate minus inflation is +0.8%, above zero, so monetary policy is restraining borrowing and spending. Higher real rates cool demand and, with a lag of a year or more, inflation.

A stronger dollar raises the local cost of dollar-priced commodities for most countries; the dollar moved +0.3% against majors over 12 months. How much reaches consumer prices (pass-through) depends on the import share, 34% of GDP here, and on how firms price.

Growth of 3.5% in 2025 compares with a 2015–24 average of 3.2%. Growth above trend uses up spare capacity and lets firms raise prices; below-trend growth opens slack that holds inflation down. Interest rates steer this channel.

Consumer prices rose 4.1% on average in 2025, down from 5.8% a year earlier. The headline rate blends imported costs, domestic demand pressure and wages; food and energy make it more volatile than core inflation.

No survey measure is shown, so this step reads the trend: with inflation at 4.1% and falling, expectations look to be cooling. If people expect high inflation they push for bigger pay rises and firms raise prices pre-emptively, making it self-fulfilling.

Rising prices erode what pay can buy unless wages keep up. With inflation easing to 4.1%, real pay is recovering. Workers then bargain for catch-up raises, which can feed back into prices.

Of 35 central banks tracked, 14 cut rates in the past 12 months, 15 hiked and 6 held; the median policy rate is 4.25%. Central banks raise rates when inflation and expectations run above target and cut when inflation is falling back or growth weakens.