After the fastest monetary tightening cycle in decades (2022-2023), the main central banks have begun a process of lowering interest rates, marked in its “last mile” by caution. Post-pandemic inflation has subsided, but normalization takes place amid financial volatility and geopolitical tensions. Protectionism, persistent underlying inflation and economies at different speeds keep authorities on guard. In the developed bloc, the European Central Bank was the first to move. After a year and a half of cutting rates (200 basis points from 4.0% in 2023), it seems to close the chapter of reductions by confirming that inflation converges to 2%. In Frankfurt, the idea of the task accomplished prevails: the deposit rate of around 2% offers a balance that allows “wait and see.” Meanwhile, the Federal Reserve navigates more turbulent waters. Although it has resumed the cuts, it does so with caution: inflation continues to show resistance to falling and the recent tariff increases add pressure to consumer prices, by making imported goods more expensive and raising domestic production costs; to which is added a solid labor market, and a lot of noise about the independence of the central bank under the Trump administration. In the United Kingdom, the Bank of England follows a middle path, since the disconnection between weak growth and still high inflation, close to 4%, forces it to move carefully in this last phase of the cycle. Japan, in marked contrast, remains the great exception, just beginning its exit from ultra-expansive policies. In emerging economies, monetary relaxation is advancing with nuances. In Latin America, central banks maintained cuts throughout 2024 and 2025, although at different paces as disinflation slowed because underlying inflation—especially in services—showed greater persistence. This process was favored by an improvement in financial conditions and a certain exchange rate appreciation. The weakness of the dollar offered additional relief, reducing imported inflation and stabilizing capital flows, although the room for further cuts narrowed in the face of persistent global risks. Looking ahead to 2026, monetary policy faces an environment of more political than economic risks. Geopolitical shocks, the rise of protectionism and disruptions in supply chains introduce inflationary supply pressures that are difficult to anticipate. Disinflation could slow — or even reverse — forcing central banks to pause or reverse their cuts. Now monetary policy stops being an automatic exercise and becomes one of balance: cutting without loosening expectations and reacting flexibly to new shocks. In short, normalization is not a destination, but a process in permanent adjustment.María Martínez, BBVA Research.
