Central banks around the world have spent the last two decades fighting inflation. For many decades, inflation was under control in the main developed countries. Most economists agree that a degree of price increase - perhaps around 1 per cent per year, or a bit more - does not influence decisions in the economy, and therefore ceases to cause a problem for policymakers.

In the period since the second World War, the most inflationary period was seen during the 1970s and early 1980s. The oil crises of 1973 and 1979 were the most important causes of the inflation, as oil was an even more important commodity to the world economy then than it is now. Central banks generally accepted that if oil prices rose sharply, inflation in economies as a whole also had to rise. They therefore did not raise interest rates despite the fact that inflation was rising rapidly. As a result of that non-response, inflation surged far beyond what any forecasters were expecting.

It was not until around 1980, when US inflation had reached 15 per cent, that world central banks woke up and decided that inflation had to be tackled. The US central bank raised interest rates very sharply (causing a recession in the process).

But it took many years to get inflation back to levels with which central banks were happy - indeed some would argue that it was not until the last couple of years that inflation reached a satisfactory level - almost 20 years after the second oil crisis.

So central bankers - having taken the best part of 20 years to recover from their mistake in the late 1970s - have understandably been reluctant to accept that inflation is dead and buried. They fear that the moment they relax, inflation will perform a Lazarus-like resurrection.

But it is time, surely, for central banks to declare victory in their war against inflation. Looking at the major economies around the world, inflation is very low. In Japan, it is less than zero - prices are falling and have been for some time. In the euro zone it is less than 1 per cent. Even in the US, which has the highest inflation rate of the three major economic blocs at about 1.5 per cent, that level of inflation is just not high enough to concern the central bank - price stability has been achieved.

So what happens next? Central banks have won their war. Inflation is defeated. What does that mean to the financial markets and to real economies?

Firstly, it means that interest rates - already low - will stay low by the standards of the last two decades. That goes not only for the Republic, which has benefited from the adoption of the euro, but for Britain, the US, the euro zone, and Japan.

Secondly, it may well mean that interest rates can go lower still. In the short term, central banks in Europe, Britain and the US are likely to assess the impact on the economy and the financial markets of the interest rate cuts already implemented, before they move to cut interest rates again.

And in the case of the US, the low unemployment rate at the moment may mean that it is quite some time before interest rates there can fall again.

But over the medium term the trend in interest rates seems clear, if the central banks do indeed declare victory.

Rates will continue to fall over the next couple of years, in reaction to a complete lack of inflationary pressure in the world's largest economies.

Thirdly, a declaration of victory by central banks will ensure a still more favourable environment for businesses. Obviously low interest rates will keep down borrowing costs, which will help, but perhaps even more importantly the environment will be considerably more stable. In general, recessions are caused by high interest rates, which in turn are usually a result of high inflation. If inflation remains under control, one of the main factors potentially causing recessions is absent. The business cycle will be less severe.

Fourthly, the risk of serious deflation and consequent depression will be averted. Although unlikely, it is possible that the global trend of low inflation and falling manufacturing prices could lead, if central banks do not face up to reality, to a descent into deflation, i.e. falling prices and output.

The developed economies have not seen those conditions since the 1930s, but Japan (and Hong Kong) are now clearly experiencing deflation. By declaring victory against inflation, central banks would in effect be stating that they will not allow deflation to spread to the rest of the world.

As we face the new year, it is essential that central banks face reality and recognise that their goal has been achieved. The effective elimination of inflation in the world's largest economies was a worthy target, and did not, contrary to some suggestions, come at the cost of high unemployment. But that objective has now been achieved. The next war must be against deflation, not inflation.

Eoin Fahy is senior economist with Ulster Bank Markets. The views expressed in this article are personal and not necessarily the views of Ulster Bank Markets.