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

The Federal Reserve of the United States troubled markets Wednesday after raising its inflation outlook and signaling fewer tax cuts next yearleaving investors scrambling to assess how it could affect global interest rates in the future.

Fed Chairman Jerome Powell said inflation was moving sideways this year and suggested the bank might cut rates only twice in 2025 – twice less than those reported in September.

Although global central banks insist on independence in their monetary policy decisions, a stronger US dollar on the back of higher interest rates – and potentially inflationary tariffs from President-elect Donald Trump – has made the outlook for the relaxation of the policy in the world more uncertain.

“When you have a more dovish Fed, this will lead to a stronger US dollar and a tightening of global financial conditions,” said Qian Wang, Vanguard’s chief Asia-Pacific economist.

This is especially true in many emerging markets, he added. “I think central banks in Asia are generally moving toward easing, but given that the Fed is going to stay higher for longer, there will be less room for easing.”

CNBC takes a look at what could be in store for global central bank monetary policy in 2025.

The Fed’s cautious stance on future rate cuts sent most Asian currencies tumbling on Thursday. The Japanese yen dipped 0.74% to 155.94 against the greenback, hitting a one-month low. The South Korean won, meanwhile, is close to its weakest level since March 2009 and the Indian. rupee fell to a record low, tumbling below the 85 mark against the US dollar.

The Bank of Japan on Thursday keep its benchmark interest rate steady to 0.25%, opting to take time to assess the impact of financial and exchange markets on economic activity and prices in Japan. The BOJ said in its statement that the decision to hold was split 8-1, with board member Naoki Tamura supporting a 25 basis point hike.

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

“The weak yen may return as a major driver of the BOJ’s rate decision in 2025 if the US dollar strengthens further when financial markets have a clear idea of ​​Trump’s policies,” he said.

“A weaker yen will continue to be a risk for the BOJ in 2025, as it will hamper the dynamics of wage-led inflation by squeezing real income.”

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

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

“The PBOC needs to focus on fighting deflation. We do not think that domestic interest rate policy would be greatly influenced by the Fed’s interest rate decision – both in the short term and in long term,” said Edmund Goh, head of China fixed income at Abrdn.

“They will be worried RMB [yuan] weakness, but if it is a controlled depreciation against the USD alongside other currencies, they will probably let the RMB slide slowly.”

Hao Zhou, chief economist at Guotai Junan International, said the PBOC may want to focus on domestic factors. “If the Fed cuts more aggressively, the PBOC has more room to cut. So, I don’t think the Fed will be a big problem for the PBOC, probably this 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 the surprise moveas the country strives to boost its economy amid growth concerns. It marked the first time the Bank of Korea has enacted two back-to-back cuts since 2009.

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

According to Chong Hoon Park of Standard Chartered Bank Korea, while the Fed’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 seems resolute in prioritizing growth, betting on a robust 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 willing to increase its FX swap lines if necessary to stabilize the KRW. Although this tool has never been used, its availability provides a credible backstop for mitigate the strength of the dollar and protect Korean companies from external shocks.

European markets fell on Thursday after the comments of the Fed, and the currency markets also reacted. The movements were more muted than in Asia, however, with the euros strengthening around 0.5% against the dollar and British pound rising 0.1% against the greenback. The dollar slipped around 0.4% against the swiss francmeanwhile.

Central banks across the continent are typically less affected by Fed moves — and the dollar’s strength — than emerging markets, which are often more dependent on foreign investment and dollar-denominated debt.

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

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

“The outlook for the U.S. and euro zone economies next year are quite mixed,” 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 currently seen taking a more dovish stance and further lowering rates next year, with money market prices in a fall in the key rate of the ECB to 1.75% from October next year – from its current 3%.

If the dollar strengthens further reach parity with the euro, however, the ECB could slow its pace of easing, according to Ryan.

The Swiss central bank went ahead with its rate cuts, beating expectations last week with the bumper 50 base points reduction, taking its main rate to 0.5%.

Here, the impact of Fed policy could be slightly greater. A stronger dollar and the weakening of the safe-haven Swiss franc could prompt a more hawkish stance from the SNB, according to Ryan – but that might not be bad.

“The SNB doesn’t have too much room to keep lowering rates… and going back to negative rates is something they want to avoid. [A stronger dollar] could potentially do some of the work for them,” Ryan said.

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

The Bank of England keep rates steady as expected at their final meeting of the year on Thursday, but markets were surprised by the extent of the divide between politicians.

The bank is still seen moving slowly on rate cuts next year, however, and money markets are now pricing in about 50 basis points of the next 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 that there was little market repricing in the aftermath.

However, he said a higher dollar could weigh on sterling, pushing up inflation on imported goods and ultimately slowing the pace of cuts.

“There is potentially a situation where the pound and the euro weaken further against the dollar, leading to higher imported inflation, especially on fuel and to a lesser extent on food. That limits the “scope of the banks to cut the rates”.