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

The U.S. Federal Reserve roiled 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 looking ahead.

Fed Chair Jerome Powell said inflation had been moving sideways this year and suggested that the bank may cut rates only twice in 2025 — two times fewer than signposted in September.

Though global central banks insist on independence in their monetary policy decisions, a stronger U.S. dollar on the back of higher interest rates — and potentially inflationary tariffs from President-elect Donald Trump — make the outlook for policy easing around the world more uncertain.

“When you have a more hawkish Fed, this will lead to a stronger U.S. dollar and a tightening of global financial conditions,” Qian Wang, chief Asia-Pacific economist at Vanguard, said.

This is especially true in a lot of emerging markets, she added. “I do think central banks in Asia are generally moving towards easing, but given this 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 banks’ monetary policy in 2025.

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

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

According to Shigeto Nagai, head of Japan Economics 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 come back as a major driver of the BOJ’s rate decision in 2025 if the U.S. dollar strengthens further as financial markets get clear idea about Trump’s policies,” he said.

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

China’s top leadership surprised the market this month by signaling a shift in its monetary policy stance after 14 years. The world’s second-largest economy is looking to switch its policy stance next year to “moderately loose” from “prudent” — a phrase it hasn’t 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 a huge influence on the trajectory of policy easing by China’s central bank, although it could put pressure on the Chinese yuan.

“The PBOC needs to focus on combating deflation. We don’t think the domestic interest rate policy would be heavily influenced by Fed’s interest rate decision — whether in the short term or long term,” said Edmund Goh, head of China fixed income at Abrdn.

“They will be concerned about RMB [yuan] weakness but if it’s a controlled depreciation against USD alongside other currencies, they would likely let 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 PBOC, probably this means that the yuan will be under pressure to depreciate.”

At its most recent policy meeting this month, the RBI kept its policy repo rate unchanged at 6.50%.

The Indian economy is slowing more than most economists had anticipated and analysts expect a 25-basis-points cut at the next policy meeting in February. One potential hurdle would be the plunging rupee, which could further fuel already-rampant inflation.

However, Dhiraj Nim, India FX strategist and economist at ANZ, said the central bank may use its foreign exchange reserves to support the rupee while proceeding with rate cuts.

“The caveat here is that, at least in the recent past, the Reserve Bank of India has been very categorical in differentiating the instruments of policymaking for FX versus the domestic economy,” he said.

“We are expecting depreciation pressure on the rupee, but not so large that the RBI is forced to keep interest rates elevated for much longer.”

South Korea’s central bank cut its benchmark interest rate by 25 basis points last month in a surprise move, as the country strives to boost its economy amid growth concerns. It marked the first time the Bank of Korea 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 while bolstering growth.

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

“The BOK appears resolute in prioritizing growth, betting on a robust economic recovery to attract capital inflows and bolster the KRW (Korean won) in the medium term,” Park said.

“Moreover, the National Pension Service (NPS) is prepared to increase its FX swap lines if necessary to stabilize the KRW. Although this tool has never been utilized, its availability provides a credible backstop to mitigate dollar strength and shield Korean businesses from external shocks.”

European markets fell on Thursday following the Fed’s comments, and currency markets also reacted. The moves were more muted than in Asia, however, with the euro strengthening around 0.5% against the dollar and British sterling rising 0.1% against the greenback. The dollar slipped around 0.4% against the Swiss franc, meanwhile.

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

The European Central Bank last week announced its fourth rate cut this year, confirming expectations for 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 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 going into next year are quite contrasting,” Ryan told CNBC Thursday, noting that euro zone growth remains fragile and vulnerable to harsh 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 lowering rates further next year, with money markets pricing in a fall in the key ECB rate to 1.75% by October next year — down from its current 3%.

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

Switzerland’s central bank has been steaming ahead with its rate cuts, last week surpassing expectations with a bumper 50-basis-point reduction, taking its main rate to 0.5%.

There, the impact of Fed policy could be slightly greater. A stronger dollar and weakening of the safe haven Swiss franc could prompt a more hawkish stance from the SNB, according to Ryan — but that might be no bad thing.

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

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

The Bank of England held rates steady as expected at its final meeting of the year Thursday, but markets were surprised by the extent of division among policymakers.

The bank is still seen moving slowly on rate cuts next year, however, and money 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 was little market repricing in the aftermath.

However, she did say 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 both sterling and euro weaken further against the dollar, leading to higher imported inflation, especially on fuel and to a lesser extent food. That limits the banks’ scope to cut rates.”