Key central banks around the world, including the one that matters most for Ireland, the European Central Bank (ECB) in Frankfurt, have been pursuing low inflation targets for over two decades.

In most cases, the targets have been about 2% and in most years they have been delivered. But for the last 18 months, inflation has been exceeding the 2% target by increasing margins.

In the eurozone, the most recent reading is just under 10%, five times the target and the latest increase in ECB interest rates announced last week was fully expected and will not be the last.

While the surge in inflation is the worst that has been experienced for several decades, there has been no change in the preferred inflation-fighting policy of the major western governments.

There are two essential components: central banks are independent, especially in setting interest rates, and required to pursue a low inflation target.

No major country has decided to take the setting of interest rates back into the hands of politicians and none has abandoned the target of 2% or thereabouts. There is little doubt that the inflation surge will be tamed. It will take time and it will be painful, but the course has been set.

Monetary policy has been exceptionally loose for five or six years in many countries, with zero or even negative official interest rates, the rates at which central banks interact with commercial banks and which are reflected in retail lending to homeowners and business borrowers.

The same central banks have been buying large volumes of bonds issued by governments, effectively printing money, in order to contain government debt service costs.

There was always a risk that loose policy would begin to stoke a broader inflation but it had been confined, until early 2021, largely to asset prices.

The rapid worldwide recovery from the COVID-19 pandemic, followed by the Russian invasion of Ukraine, have combined to unleash a broader inflation of consumer prices led by energy costs but spreading across the economy and triggering wage demands.

In leaving central bank independence untouched, along with the formal inflation targets to which the central banks are committed, governments have signalled that inflation will be tamed the old-fashioned way, through reversing the loose monetary policy.

Target range

Unless there is a dramatic capitulation by governments of which there has been no sign whatever, the central banks will do what they have been mandated to do, namely get inflation back down to the 2% target range.

They will do this by pushing up official interest rates until they think inflation numbers are trending downwards, bad news for borrowers and good news for bank depositors.

They will also quit buying government bonds and this is negative for governments which will see debt service costs escalate.

Governments have been enjoying an accidental holiday from debt service burdens.

Both sets of policies, higher official interest rates and sales of central bank bond holdings, have already commenced and will continue, at least into 2023.

The ECB has not revealed a future path for interest rates because its future response will have to follow the data

The central banks were caught rather unawares when inflation took off last year and most were slow to commence a tighter policy. They have made up for lost time and the rise in interest rates is beginning to hurt. How much further will it have to go?

The ECB has not revealed a future path for interest rates because its future response will have to follow the data. If inflation stays high, they will keep pushing up rates.

But policymakers are conscious of the risk of recession in Europe: there are signs that a slowdown has commenced and tighter money will be pursued only so long as necessary. As soon as the inflation numbers start coming down, the ECB will pause the interest rate rises.

The Bank of Canada has been the first to talk about ending interest rate hikes next year and the others will follow. This could begin to happen quite soon, especially if hostilities in Ukraine can somehow be halted.

Few observers expect that the central banks will still be on red alert a year from now, but by that time official rates in the eurozone could have seen several further increases.

Whenever the current phase of rising interest rates comes to a close, borrower costs will not fall back to the extraordinarily low levels seen in recent years. Inflation had been low or zero, official interest rates even lower, sometimes negative, unprecedented in modern times and the central banks will resist another excursion into unorthodox monetary policy.

Even if inflation falls back to 2%, lending rates on mortgages and business loans will move higher and will stay there.

Governments face higher borrowing costs making budget deficits a dangerous option – ask Liz Truss – and there is less room for tax giveaways or increased spending.