U.S. Federal Reserve Chairman Powell delivered a speech at a press conference, announcing that the Federal Reserve would cut interest rates by 25 basis points after holding a two-day interest rate policy meeting in Washington, U.S. on December 18, 2024.
Kevin Lamarque | Reuters
The Federal Reserve raised its inflation outlook on Wednesday and indicated a smaller rate cut next year, causing market turmoil and investors to assess the impact on future global interest rates.
Federal Reserve Chairman Jerome Powell said that inflation has been trading sideways this year and suggested that the central bank may only cut interest rates twice in 2025, which is twice the number of rate cuts in September.
While global central banks maintain their independence in monetary policy decisions, a stronger dollar amid rising interest rates and potential inflation tariffs from President-elect Donald Trump has made the outlook for global easing more uncertain.
“When the Fed becomes more hawkish, it will lead to a stronger dollar and tightening of global financial conditions,” said Wang Qian, chief Asia-Pacific economist at Vanguard Group.
This is especially true in many emerging markets, she added. “I do think Asian central banks are moving towards easing in general, but there will be less room for easing given that the Fed will remain elevated for longer.”
CNBC explores what may happen to global central bank monetary policy in 2025.
Asia
The Federal Reserve’s cautious stance on future interest rate cuts sent most Asian currencies lower on Thursday. Japanese JPY It fell 0.74% to 155.94 against the dollar, hitting a one-month low. Meanwhile, the South Korean won is hovering near its lowest level since March 2009 and the Indian dollar is hovering around rupee It fell to a record low, falling below the 85 level against the US dollar.
Bank of Japan Governor Kazuo Ueda attends a press conference after a two-day monetary policy meeting at the Bank of Japan headquarters in Tokyo on October 31, 2024.
Richard A. Brooks | Getty Images
Bank of Japan
Shigeto Nagai, head of Japan economics at Oxford Economics, said the Federal Reserve’s more cautious stance on cutting interest rates in 2025 will increase the risk of further strength in the dollar.
“If the dollar strengthens further as financial markets gain clarity on Trump’s policies, the weak yen could return to be the main driver of the Bank of Japan’s 2025 interest rate decision,” he said.
“A weaker yen will continue to pose a risk to the Bank of Japan through 2025, as it will squeeze real incomes and thus hinder wage-driven inflation dynamics.”
People’s Bank of China
China’s top leadership surprised markets this month by signaling a shift. Monetary policy stance in 2014. The world’s second-largest economy hopes to shift its policy stance from “prudent” to “moderately loose” next year – a term it has not used since the depths of the global financial crisis in 2008.
Analysts said the Fed’s revised outlook for future interest rate cuts is unlikely to have a huge impact on the Chinese central bank’s easing policy trajectory, although it could put pressure on the yuan.
“The People’s Bank of China needs to focus on fighting deflation. We believe that domestic interest rate policy will not be seriously affected by the Fed’s interest rate decision, whether in the short or long term.” Abden.
“They will worry RMB (The yuan) is weak, but if it’s a controlled devaluation against the dollar and other currencies, they could let the yuan slide slowly.
Zhou Hao, chief economist at Guotai Junan International, said the People’s Bank of China may want to focus on domestic factors. “If the Fed cuts interest rates more deeply, the central bank will have more room to cut interest rates. So, I don’t think the Fed will cause a big problem for the central bank, which may mean that the RMB will face depreciation pressure.”
Reserve Bank of India (RBI) Governor Sanjay Malhotra during a press conference on Wednesday, December 11, 2024, in Mumbai, India. He will work to safeguard economic stability and policy continuity in his role. Photographer: Dhiraj Singh/Bloomberg via Getty Images
Bloomberg | Bloomberg | Getty Images
reserve bank of india
At a recent policy meeting this month, The Reserve Bank of India kept the policy repo rate unchanged at 6.50%.
India’s economy has slowed more than most economists expected, with analysts expecting a 25 basis point interest rate cut at the next policy meeting in February. One potential obstacle is a plunge in the rupee, which could further exacerbate already rampant inflation.
However, Dhiraj Nim, India currency strategist and economist at ANZ Bank, said the central bank may use its foreign exchange reserves to support the rupee while continuing to cut interest rates.
“It is important to note that, at least in recent times, the RBI has been very clear in distinguishing between foreign exchange policy-making tools and domestic economic policy-making tools,” he said.
“We expect depreciation pressures on the rupee, but not to such an extent that the RBI will be forced to keep interest rates high for longer.”
bank of korea
The Bank of Korea cut its benchmark interest rate by 25 basis points last month The move comes as a surprise as the country struggles to boost its economy amid growth concerns. This is the first time since 2009 that the Bank of Korea has cut interest rates twice in a row.
Like many of its Asian peers, South Korea’s central bank is trying to strike a balance between supporting its currency and promoting economic growth.
Chong Hoon Park of Standard Chartered Bank Korea said that while the Fed’s latest interest rate outlook and the resulting appreciation of the dollar may bring short-term pressure, it is unlikely to undermine the Bank of Korea’s dovish trajectory.
“The Bank of Korea seems determined to prioritize growth, betting on a strong economic recovery to attract capital inflows and boost the won in the medium term,” Park said.
“In addition, the National Pension Service (NPS) is prepared to increase foreign exchange swap lines if necessary to stabilize the Korean won. Although this tool has never been used, its availability provides reliable support to mitigate the strengthening of the U.S. dollar and Protect Korean companies from external shocks.”
Europe
The continent’s central banks have generally been less affected by the Fed’s measures and a stronger dollar than emerging markets, which tend to be more reliant on foreign investment and dollar-denominated debt.
European Central Bank President Christine Lagarde speaks to reporters after the Governing Council monetary policy meeting on September 12, 2024 in Frankfurt, Germany.
Jana Rodenbush | Reuters
European Central Bank
The European Central Bank announced last week The fourth rate cut this year confirmed expectations for a quarter-percentage point cut and lowered inflation forecasts 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 small, but not zero,” adding that the bank was more likely to be affected by Trump’s policies.
“The outlook for the U.S. and euro zone economies next year is in sharp contrast,” Ryan told CNBC on 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 European Central Bank is currently believed to take a more dovish stance and cut interest rates further next year, with money markets expecting the ECB’s key interest rate to fall to 1.75% by October next year, down from the current 3%.
However, Ryan said the ECB could slow down the pace of easing if the dollar strengthens further to reach parity with the euro.
swiss national bank
The Swiss National Bank has been steadily advancing interest rate cuts, with a larger-than-expected cut last week. A significant 50 basis points cut, with the main interest rate falling to 0.5%.
There, the impact of Fed policy may be slightly greater. Ryan said a stronger U.S. dollar and a weaker safe-haven Swiss franc could prompt the SNB to take a more hawkish stance, but that might not be a bad thing.
“The SNB doesn’t have a lot of room to keep cutting interest rates… They want to avoid going back to negative rates. (The stronger dollar) might do some work for them,” Ryan said.
New central bank chair Martin Schlegel told CNBC’s Caroline Ross last week that the central bank cannot rule out a move to negative interest rates as it tries to ensure that inflation “remains within a range consistent with price stability.”
On November 29, 2024, Bank of England Governor Andrew Bailey was at the central bank headquarters in the City of London, England.
Holly Adams | Bloomberg | Getty Images
bank of england
However, the Bank is still expected to cut interest rates at a slow pace next year, with money markets currently pricing in an upcoming rate cut of about 50 basis points.
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 has been little market repricing since.
She did say, however, that a stronger dollar could put pressure on sterling, pushing up inflation on imported goods and ultimately slowing the pace of cuts.
“There is a possibility of further weakness in sterling and the euro against the dollar, leading to higher imported inflation, particularly in fuel and to a lesser extent in food. This limits the scope for bank rate cuts.”
About The Author
