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

US Federal Reserve Turbulent markets Wednesday after raising inflation expectations and signals Fewer interest rate cuts next yearleaving investors scrambling to assess the extent of its impact on global interest rates in the future.

Federal Reserve Chairman Jerome Powell said inflation had been moving sideways this year and suggested the bank might cut interest rates just twice in 2025 — twice less than it set in September.

Despite global central banks’ insistence on independence in their monetary policy decisions, the US dollar’s rise on the back of rising interest rates – and potential inflationary tariffs from President-elect Donald Trump – makes the prospects for policy easing around the world more uncertain.

“When you have a more hawkish Fed, this will cause the US dollar to rise and global financial conditions to tighten,” said Qian Wang, chief Asia-Pacific economist at Vanguard.

She added that this is especially true for many emerging markets. “I think central banks in Asia are generally easing, but given that the Fed will stay elevated for longer, there will be less room to ease.”

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

The Federal Reserve’s dovish stance on future interest rate cuts sent most Asian currencies lower on Thursday. The Japanese yen It fell 0.74% to 155.94 against the dollar, hitting a one-month low. Meanwhile, the South Korean won remained hovering near its weakest level since March 2009 and the Indian one rupee It fell to a record low, falling below the 85 level against the US dollar.

Bank of Japan on Thursday The benchmark interest rate was kept constant At 0.25%, he chose to take the time to evaluate the impact of financial and foreign exchange markets on economic activity and prices in Japan. The Bank of Japan said in its statement that the suspension decision was split by a majority of 8-1, with board member Naoki Tamura calling for a 25 basis point hike.

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

“The weak yen may return as a main driver of the Bank of Japan’s interest rate decision in 2025 if the US dollar strengthens further as financial markets get a clear idea of ​​Trump’s policies,” he said.

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

China’s top leadership surprised the market this month by signaling a shift Its monetary policy position after 14 years. The world’s second-largest economy is looking to shift its policy stance next year to “moderately lenient” from “prudent” – a phrase it has not used since the 2008 global financial crisis.

Analysts said the Fed’s revised expectations for future interest rate cuts are unlikely to have a significant impact on the path of policy easing by China’s central bank, although it may pressure the Chinese yuan.

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

“They’ll be worried about yuan (The yuan) is weak but if it is a controlled decline against the US dollar along with other currencies, they will likely allow the renminbi to fall slowly.

The People’s Bank of China may want to focus on domestic factors, said Hao Zhou, chief economist at Guotai Junan International. “If the Fed cuts more aggressively, the People’s Bank of China has more room to cut. So, I don’t think the Fed will be a big problem for the People’s Bank of China, and perhaps that means the yuan will be under pressure to devalue.”

South Korea’s central bank cut its benchmark interest rate by 25 basis points last month A sudden moveas the country strives to boost its economy amid growth concerns. This is the first time the BOK has implemented two consecutive cuts since 2009.

Like many of its Asian counterparts, the Bank of Korea is trying to strike a balance between supporting its currency and promoting growth.

According to Chung Hoon Park of Standard Chartered Korea, while the latest interest rate forecasts from the Fed and the resulting dollar rally may impose short-term pressures, they are unlikely to derail the BOK’s dovish path.

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

“Furthermore, the National Pension Service (NPS) is prepared to increase foreign exchange swap lines if necessary to stabilize the South Korean won. Although this tool has never been used, its availability provides reliable support to mitigate the strength of the dollar and protect Korean companies from external shocks.

European markets fell On Thursday after the Fed’s comments, currency markets also reacted. Movements were quieter than in Asia, however euro Strengthening about 0.5% against the dollar and British pound sterling An increase of 0.1% against the dollar. The dollar fell about 0.4% against the dollar Swiss francin the meantime.

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

The European Central Bank announced last week Fourth degree cut This year, which confirms expectations of a quarter-point move and a reduction in inflation expectations for this year and next.

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

“The outlook for the US and eurozone economies next year is quite mixed,” Ryan told CNBC on Thursday, noting that eurozone growth remains fragile and vulnerable to harsh trade policies.

He added: “The biggest impact of Trump 2.0 will be weak growth.”

The European Central Bank is currently seen as taking a more pessimistic stance Lower interest rates further Next year, with financial markets pricing in the ECB’s key interest rate falling to 1.75% by October next year – down from the current interest rate of 3%.

The dollar should strengthen further Reach parity However, with the euro, the ECB could slow the pace of monetary easing, according to Ryan.

The Swiss Central Bank is moving forward with interest rate cuts, exceeding expectations last week by The bumper is 50 basis points Reduction, bringing the main interest rate to 0.5%.

Here the impact of Fed policy may be slightly greater. A stronger dollar and a weaker Swiss franc, a safe haven, could lead the SNB to take a tougher stance, according to Ryan. But this may not be a bad thing.

“The SNB doesn’t have much room to continue lowering interest rates…a return to negative interest rates is something they want to avoid. (A stronger dollar) would probably do some work in their favor,” Ryan said. .

New central bank head Martin Schlegel told CNBC’s Caroline Roth last week that the bank cannot rule out a shift to negative interest rates as it tries to ensure inflation remains within a range consistent with price stability.

Bank of England Maintained rates constant As expected at its last meeting of the year on Thursday, the markets were surprised by the extent of the division among decision-makers.

However, the bank is still expected to move slowly on interest rate cuts next year, and financial markets are now pricing in roughly 50 basis points of 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 that there had been little market repricing in the aftermath.

However, she said a stronger dollar could weigh on sterling, leading to higher inflation on imported goods and an eventual slower pace of cuts.

“There is likely to be a situation where both the pound and the euro weaken further against the dollar, leading to higher imported inflation, particularly on fuel and to a lesser extent food. This limits the scope for banks to cut interest rates.”