While the central banks continue to gear up for another round of rate cuts, while more remain on the horizon with the expectations of the rate cuts to be as much as 200 bps by the end of 2025, the debate whether these reductions are too aggressive has taken center stage. The intention behind these rate cuts despite stemming from an approach to stimulate the economy, too much aggressiveness takes out the stimulating factor from the policy decisions and ends up exaggerating the magnitude of rate cuts or any other economic stimulations.

Inflation is Still Biting Hard

Although there has been some notable progress in curbing inflation in certain sectors, household goods and essential services still continue to be a huge pain point for the consumers with inflation across these segments still being excessive across each year. Grocery prices, utility bills, and everyday necessities have seen only marginal relief from the inflationary pressures that surged over the past two years. When the core components of daily life are still inflating faster than wages, it’s clear that inflation hasn’t fully loosened its grip on households.

The most alarming part? Even though headline inflation rates may have softened, consumers aren’t feeling the difference in their wallets. The cost of staples like groceries, rent, and healthcare are continuing to rise. Inflation at the grocery store was up by 4.9% year-over-year as of the last report. Such substantial numbers paint a very vivid picture of the day-to-day financial struggles that many households still face. 

The Risk of Further Inflationary Pressure

Central banks seem eager to support growth by lowering borrowing costs. However, aggressively cutting rates when inflation has not significantly eased—particularly for goods and services that affect households most—could be counterproductive. Lower interest rates can stimulate consumer spending and business investment, but they also run the risk of fueling further inflation by increasing demand. This is particularly concerning in sectors where supply chains remain constrained, and any uptick in demand could quickly lead to higher prices.

Rate cuts, if too sharp or too soon, can act as fuel on the fire. When demand for goods rises too quickly before supply can catch up, prices naturally increase. The same pattern could play out across various sectors—especially energy, food, and housing—causing another wave of inflation. Essentially, aggressive rate cuts could undo much of the progress made in controlling price surges, leading to a more difficult inflationary environment in the future.

Recent Rate Cut: A Case of Overreach?

The recent 50 basis point (bps) rate cut has already come under scrutiny for being higher than what many analysts and economists had forecasted at 25 bps, which would have been a significantly more cautious approach for the economy. The 50 bps rate cut by contrast sends a message of eagerness from the central bank to provide immediately relief to borrowers and business with significant misinterpretation of inflation data not taking into account its impact on the consumer class.

This decision to cut rates more than anticipated could signal panic rather than control. It remains worth noting and reminiscing the actions taken during the past economic crises when rate cuts were often followed by runaway inflation or asset bubbles. This brings up the question whether the urgency behind these cuts is being overstated, especially when inflationary pressures remain embedded in crucial areas of the economy.

Conclusion

The prospect of aggressive rate cuts, especially in the face of persistently high inflation for household goods, should give us pause. While rate reductions can help boost economic growth, they can also add fuel to the inflationary fire if implemented too aggressively or too soon. The recent 50 bps cut already feels like an overreach, and further cuts could worsen inflation in essential consumer goods, leaving households to bear the brunt of higher costs. A more balanced, cautious approach to monetary policy is needed to ensure inflation doesn’t reignite just as consumers begin to recover.