What to expect from global central banks in 2025 after the Fed slows cuts

The US Federal Reserve hectic markets Wednesday after raising its inflation outlook and signaling Fewer rate cuts next year.leaving investors scrambling to assess how it could affect global interest rates going forward.

Federal Reserve Chair Jerome Powell said inflation had been moving sideways this year and suggested the bank could cut rates just twice in 2025, twice as few as it indicated in September.

Although global central banks insist on independence in their monetary policy decisions, a stronger US dollar supported by higher interest rates (and potentially inflationary tariffs from President-elect Donald Trump) make the prospects for policy easing across the globe world are more uncertain.

“When there is a more hawkish Federal Reserve, this will lead to a stronger US dollar and a tightening of global financial conditions,” said Qian Wang, chief Asia-Pacific economist at Vanguard.

This is especially true in many emerging markets, he added. “I think central banks in Asia are generally moving towards easing, but with the Fed staying at higher levels for longer, there will be less room for easing.”

CNBC analyzes what the monetary policy of global central banks could hold in 2025.

The Federal Reserve’s cautious stance on future rate cuts sent most Asian currencies reeling on Thursday. the japanese yen fell 0.74% to 155.94 against the dollar, hitting a one-month low. Meanwhile, the South Korean won hovered around its weakest level since March 2009 and the Indian dollar rupee fell to a record low, falling below the 85 mark against the US dollar.

The Bank of Japan on Thursday kept its reference interest rate stable at 0.25%, choosing to take the time to evaluate the impact of the financial and currency markets on Japan’s economic activity and prices. The BOJ said in its statement that the hold decision was split 8-1, with board member Naoki Tamura arguing for a 25 basis point increase.

According to Shigeto Nagai, head of Japan Economics at Oxford Economics, the Federal Reserve’s more cautious stance on rate cuts in 2025 will increase the risk of further dollar strength.

“The weak yen may again be a major driver of the BOJ’s rate decision in 2025 if the US dollar strengthens further as financial markets get a clearer picture of Trump’s policies,” he said.

“A weaker yen will remain a risk for the BOJ in 2025 as it will hamper wage-driven inflation dynamics by constraining real income.”

China’s top leaders surprised the market this month by signaling a change in its monetary policy stance after 14 years. The world’s second-largest economy is seeking to change its policy stance next year from “prudent” to “moderately flexible,” a phrase it has not used since the depths of the 2008 global financial crisis.

Analysts said the Federal Reserve’s revised outlook on future rate cuts is unlikely to have much influence on the trajectory of policy easing by China’s central bank, although it could put pressure on the Chinese yuan.

“The People’s Bank of China needs to focus on combating deflation. We do not believe that domestic interest rate policy will be strongly influenced by the Fed’s decision on interest rates, either in the short term or in the long term” said Edmund Goh, head of China fixed income at Abrón.

“They will be worried about RMB (yuan) but if it is a controlled depreciation against the dollar along with other currencies, they would probably let the RMB fall slowly.”

Hao Zhou, chief economist at Guotai Junan International, said the People’s Bank of China may want to focus on domestic factors. “If the Fed makes more aggressive cuts, the People’s Bank of China has more room to do so. So I don’t think the Fed will be a big problem for the People’s Bank of China, this probably means that the yuan will be under pressure to depreciate”.

South Korea’s central bank cut its benchmark interest rate by 25 basis points last month in a surprise moveas the country struggles to boost its economy amid concerns about growth. It was the first time the Bank of Korea implemented two consecutive cuts since 2009.

Like many of its Asian peers, Korea’s central bank is trying to strike a balance between supporting its currency while boosting growth.

According to Standard Chartered Bank Korea’s Chong Hoon Park, while the Federal Reserve’s latest rate outlook and the resulting dollar appreciation may introduce short-term pressures, they are unlikely to derail the BOK’s dovish trajectory.

“The BOK appears determined to prioritize growth, betting on a strong economic recovery to attract capital flows and strengthen the KRW (Korean won) in the medium term,” Park said.

“In addition, the National Pension Service (NPS) is prepared to increase its currency swap lines if necessary to stabilize the KRW. Although this tool has never been used, its availability provides credible support to mitigate the strength of the dollar and protect Korean companies from external shocks.”

European markets fell on Thursday following the Federal Reserve’s comments, and currency markets also reacted. However, the movements were more moderate than in Asia, with the euro strengthening around 0.5% against the dollar and british pound sterling rising 0.1% against the dollar. The dollar fell around 0.4% against the swiss francmeanwhile.

Central banks across the continent tend to be less affected by the Federal Reserve’s actions (and the strength of the dollar) than emerging markets, which are often more reliant on foreign investment and dollar-denominated debt.

The European Central Bank announced last week its fourth rate cut this year, confirming expectations of a quarter-percentage-point move and lowering its inflation forecast for this and next year.

Matthew Ryan, head of market strategy at global financial services firm Ebury, said the impact of Powell’s comments on the ECB will likely be “relatively modest but not zero,” adding that the bank is more likely to see influenced by Trump’s policies.

“The outlook for the U.S. and euro zone economies going into next year is quite contrasting,” Ryan told CNBC on Thursday, noting that euro zone growth remains fragile and vulnerable to tough trade policies. .

“The biggest impact of Trump 2.0 will be weaker growth,” he added.

The ECB is now seen as taking a more dovish stance and lowering rates even further next year, with money markets pricing in a drop in the ECB’s key rate to 1.75% by October next year, down from the current 3%.

Should the dollar strengthen further to achieve parity However, with the euro, the ECB could slow its pace of easing, according to Ryan.

Switzerland’s central bank has pressed ahead with its rate cuts and last week beat expectations with a bumper 50 basic points reduction, bringing its main rate to 0.5%.

There, the impact of Federal Reserve policy could be slightly larger. A stronger dollar and the weakening of the safe-haven Swiss franc could prompt a tougher stance from the SNB, according to Ryan. but that may not be a bad thing.

“The SNB doesn’t have much room to continue lowering rates… and going back to negative rates is something they would like to avoid. (A stronger dollar) could potentially do some of the work for them,” Ryan said.

New central bank Chairman Martin Schlegel told CNBC’s Carolin Roth last week that the bank could not rule out a shift toward negative interest rates as it tries to ensure inflation “remains within the range consistent with price stability.” .

The Bank of England kept rates stable as expected at its last meeting of the year on Thursday, but markets were surprised by the degree of division among policymakers.

However, the bank is still seen moving slowly on rate cuts next year, and money markets are now pricing in roughly 50 basis points of the upcoming cuts.

Lindsay James, investment strategist at Quilter Investors, said the impact of the Fed’s comments on the Bank of England was likely to be minimal, noting there was little repricing in the market afterwards.

However, he did say that a higher dollar could weigh on sterling, raising inflation in imported goods and ultimately slowing the pace of cuts.

“There is potentially a situation where both sterling and the euro weaken further against the dollar, leading to higher imported inflation, especially in fuel and, to a lesser extent, food. That limits the margin of banks to reduce rates.