The global economy is showing signs of recovery from the severe impacts of the COVID-19 pandemic, challenging the previously held pessimistic outlooks on economic growthHowever, this short-term stabilization does not obscure the long-term challenges that persist, suggesting that central banks across nations still have significant work ahead of them.

According to recent reports, there has been a noticeable decline in inflation rates worldwide, with levels approaching policy targetsEconomic activities and financial systems have displayed remarkable resilience, leading economists and market participants to broadly agree on a possible "soft landing" for the global economyCompared to the same period last year, the optimism surrounding these expectations has surged dramaticallyThe report attributes the continued decline in global inflation from its peak in 2022 to the effectiveness of monetary policies implemented by various countries

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The recovery of economic activities and the normalization of supply and demand dynamics have played pivotal roles in easing inflationary pressuresAdditionally, a flourishing job market has bolstered short-term demand, reinforced by positive fiscal support and expansions adopted by some nations, which have kept economic activities buoyantThe widespread availability of long-term fixed-rate loans has also enabled borrowers to mitigate risks associated with high-interest rates and debt burdens effectively.

The resilience of the financial system has been instrumental in supporting economic activities, with the sole exception being the Credit Suisse crisis in March 2023; the banking sector has generally avoided severe pressureWhile banks have proceeded cautiously with credit operations, financial markets remained vibrant, witnessing a surge in stock prices, particularly in the technology sector

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Moreover, bond spreads, essential for assessing issuers' credit risks, are at historic lowsThis optimistic sentiment among investors reflects a strong anticipation for continued accommodative monetary policy.

Despite the consensus that financial markets may experience stabilization in prices, a speeding up of economic growth, easing pressures on central banks, and a sound financial system leading to a soft landing, the lurking risks and pressure factors must not be overlookedIn the short term, the price fluctuations resulting from the pandemic have affected commodity prices differently; thus, commodity prices remain relatively elevated while labor prices rapidly rebound, becoming a primary driver of inflationIn the long term, the global economy had been unsustainably reliant on a debt-driven development model prior to the pandemic, where low inflation rates and high growth masked inherent risks

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The pandemic disrupted this model, revealing prominent concerns such as excessive government and private debt and insufficient space for monetary and fiscal policies.

Throughout the challenging period marked by high inflation pressures and bleak economic development stemming from the pandemic, countries around the world demonstrated unprecedented coordination in formulating their tightening policies, yielding significant resultsNow, as global economic conditions improve, governments are reverting to more individualistic approaches in policy adjustments from restrictive to accommodative stances, particularly highlighted in the case of the United StatesWhile many central banks in the Eurozone and much of Asia have either adopted or are preparing to adopt accommodative monetary policies, the Federal Reserve has continued to raise interest rates amidst a lack of significant inflation pressure

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This has led to a rise in the value of the U.Sdollar, creating palpable impacts on the flow of international capital and the stability of financial marketsSome nations have begun implementing measures such as foreign exchange interventions to counter these currency risks.

The challenges confronting countries today primarily revolve around maintaining price stability while laying down solid foundations for sustainable and balanced development in the long runIn efforts to re-establish price stability, nations will need to advance measures aimed at containing inflationRecently, several major economies are grappling with the phenomenon of "sticky inflation," indicating that the global economy has not yet disentangled itself from financial vulnerabilitiesThis necessitates a continued vigilance towards the risks of inflation rebound, with timely and resolute actions needed to re-establish tightening policies when signs emerge

Central banks should avoid significantly lowering interest rates based solely on a simplistic understanding of "neutral" or "natural" rates, as insufficient policy space may become apparent laterFurthermore, strengthening the resilience of the financial system is essential, especially in preparation for inevitable credit losses that may arise in the futureAt a macro level, it is crucial to align policies with financial cycle conditions, refraining from premature relaxation of monetary policies, and enforcing rigorous regulation on financial institutions and asset valuations to curb reckless behaviors.

Looking ahead, the formulation of monetary policies must learn from historical experiences to continuously refine policy frameworks that ensure structural safety, realistic objectives, and flexibilityThere must be a shift away from excessive reliance on monetary policy as a primary driver of economic growth