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

The US Federal Reserve turbulent markets Wednesday after it raised its inflation outlook and signaled fewer interest rate cuts next yearleaving investors to consider how this might impact global interest rates in the future.

Fed Chairman Jerome Powell said inflation has moved sideways this year and suggested the bank may cut rates only twice in 2025 – twice less than what was announced in September.

Although global central banks insist on independence in their monetary policy decisions, a stronger U.S. dollar due to higher interest rates – and potentially inflationary tariffs from President-elect Donald Trump – make the prospects for monetary easing globally more uncertain.

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

This is particularly true for many emerging markets, she added. “While I think central banks in Asia are generally moving towards easing, given that the Fed will be sticking with its higher interest rate for longer, there will be less room for easing.”

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

The Fed’s cautious stance on future interest rate cuts sent most Asian currencies reeling on Thursday. The Japanese yen The price fell 0.74% against the greenback to 155.94, hitting a one-month low. South Korea’s victory, meanwhile, hovered near its weakest since March 2009 and India’s rupee fell to a record low and fell below the 85 mark against the US dollar.

The Bank of Japan on Thursday kept its key interest rate stable at 0.25% and decided 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 maintain rates was split 8-1, with board member Naoki Tamura supporting a 25 basis point increase.

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

“The weak yen could again be an important factor in the BOJ’s interest rate decision in 2025 if the US dollar continues to strengthen as financial markets get a clear idea of ​​Trump’s policies,” he said.

“A weaker yen will continue to pose a risk for the BOJ in 2025 as it will slow wage-driven inflation dynamics by putting pressure on real income.”

China’s top leadership surprised the market this month by announcing a turnaround its monetary policy course after 14 years. The world’s second-largest economy plans to change its policy stance next year from “cautious” to “moderately loose” – a phrase 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 major impact on the direction of China’s central bank’s monetary easing, although it could put pressure on the Chinese yuan.

“The PBOC must focus on fighting deflation. We do not believe that domestic interest rate policy will be heavily influenced by the Fed’s interest rate decision – either in the short or long term,” said Edmund Goh, head of China fixed income at Abrdn.

“You will be worried RMB (Yuan) weakness, but if it is a controlled depreciation against the USD and other currencies, they would probably let the RMB fall slowly.

Hao Zhou, chief economist at Guotai Junan International, said the PBOC may want to focus on domestic factors. “If the Fed cuts rates more aggressively, the PBOC will have more room to cut. So I don’t think the Fed will be a big problem for the PBOC, probably that means the yuan will be under devaluation pressure.”

South Korea’s central bank cut its key interest rate by 25 basis points last month surprising moveas the country seeks to boost its economy amid growth concerns. It was the first time since 2009 that the Bank of Korea implemented two consecutive cuts.

Like many of its Asian counterparts, 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, the Fed’s recent interest rate outlook and resulting dollar appreciation may trigger short-term pressures but are unlikely to derail the Bank of Korea’s dovish stance.

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

“In addition, the National Pension Service (NPS) stands ready to increase its FX swap lines if necessary to stabilize the KRW. Although this instrument has never been used, its availability provides a credible hedge to mitigate the dollar’s strength and protect Korean companies from external shocks.”

European markets fell on Thursday following the Fed’s comments, and currency markets also reacted. However, the movements were more subdued than in Asia euro strengthened by around 0.5% against the dollar and British pound rose 0.1% against the greenback. The dollar slipped around 0.4% against the US dollar Swiss francin the meantime.

Central banks across the continent tend to be less affected by the Fed’s actions – and the dollar’s strength – than emerging markets, which often rely more heavily on foreign investment and dollar-denominated debt.

The European Central Bank announced its last week fourth interest rate cut this year, confirming expectations of a change of a quarter of a percentage point 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 is quite opposite,” 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 expected to take a more dovish stance Lower interest rates further Money markets are pricing in a cut in the ECB’s key interest rate from the current 3% to 1.75% by October next year.

Should the dollar continue to appreciate? Achieve parity However, with the euro, the ECB could slow down its pace of easing, said Ryan.

The Swiss central bank has pushed ahead with its interest rate cuts at full speed, exceeding expectations with one last week Bumper 50 base point Reduction of the main rate to 0.5%.

The impact of Fed policy could be somewhat greater there. A stronger dollar and a weakening of the safe haven Swiss franc could lead to a more hawkish stance from the SNB, according to Ryan – but that might not be a bad thing.

“The SNB does not have much scope to cut interest rates further… and they want to avoid a return to negative interest rates. (A stronger dollar) could potentially do some of the work for them,” Ryan said.

The central bank’s new chairman, Martin Schlegel, told CNBC’s Carolin Roth last week that the 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.”

The Bank of England kept interest rates stable However, as expected at the final meeting of the year on Thursday, markets were surprised by the extent of the division among policymakers.

However, the Bank is still expected to make a slow move to cut interest rates next year, and money markets are currently pricing in around 50 basis points of impending cuts.

Lindsay James, investment strategist at Quilter Investors, said the impact of the Fed’s comments on the Bank of England was expected to be minimal, noting that there had been little market repricing as a result.

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

“There is a possibility that both sterling and the euro will weaken further against the dollar, leading to higher import inflation, particularly in fuel and to a lesser extent food. This limits the scope for banks to cut interest rates.”