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

US Federal Reserve crazy markets Wednesday after raising the inflation and signaling outlook fewer interest rate cuts next yearleaving investors struggling to assess what impact this might have on global interest rates in the future.

Fed Chairman Jerome Powell said that inflation is on a downward trend this year and suggested that the bank may cut interest rates only twice in 2025 – twice less than announced in September.

While global central banks insist on independence in their monetary policy decisions, a stronger U.S. dollar as a result of higher interest rates – and potentially inflationary tariffs imposed by President-elect Donald Trump – makes the prospects for monetary easing around the world more likely. uncertain.

“If the Fed becomes more hawkish, it will lead to a stronger U.S. dollar and tighter global financial conditions,” said Qian Wang, Vanguard's chief economist for Asia-Pacific.

This is especially true in many emerging markets, she added. “I believe that central banks in Asia are generally moving towards easing monetary policy, but given that the Fed will remain high for an extended period of time, there will be less room to loosen monetary policy.”

CNBC takes a look at what may lie ahead for the monetary policies of global central banks in 2025.

The Fed's cautious stance on future interest rate cuts caused most Asian currencies to decline on Thursday. Japanese yen fell 0.74% to 155.94 against the dollar, hitting a one-month low. Meanwhile, South Korea's win hovered near its lowest level since March 2009, and India's win rupee fell to a record low, falling below 85 against the US dollar.

Bank of Japan on Thursday kept the reference interest rate constant at 0.25%, deciding to spend time assessing the impact of financial and currency markets on economic activity and prices in Japan. In its statement, the BOJ said the decision to uphold the decision was split 8-1, with board member Naoki Tamura in favor of the 25-basis-point increase.

According to Shigeto Nagai, head of Japan Economics at Oxford Economics, a more cautious stance by the Fed on interest rate cuts in 2025 will increase the risk of further strengthening of the dollar.

“The weak yen could return as a major factor influencing the BOJ's interest rate decision in 2025 if the U.S. dollar continues to strengthen as financial markets get a clear picture of Trump's policies,” he said.

“A weaker yen will continue to pose a risk to the BOJ in 2025 as it will dampen the dynamics of wage-driven inflation by reducing real incomes.”

China's top management surprised the market this month by signaling a turnaround its stance in monetary policy after 14 years. The world's second-largest economy aims to shift its policy stance next year from “moderately loose” to “cautious” – a term it has not used since the depths of the 2008 global financial crisis.

Analysts say the Fed's revised outlook for future interest rate cuts is unlikely to have a major impact on the Chinese central bank's easing trajectory, although it could put pressure on the Chinese yuan.

“PBOC must focus on fighting deflation. “We don't think the Fed's interest rate decision will have a major impact on domestic interest rate policy – either in the short or long term,” said Edmund Goh, head of Abrdn's China fixed income division.

“They will be worried RMB (yuan), but if it is a controlled depreciation of the US dollar along with other currencies, it will likely lead to a slow decline in the value of the yuan.”

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

South Korea's central bank cut its benchmark interest rate by 25 basis points last month a surprising moveas the country seeks to stimulate its economy amid concerns about economic growth. This was the first time since 2009 that the Bank of Korea made two simultaneous cuts.

Like many other Asian peers, Korea's central bank is struggling to strike a balance between supporting its currency and boosting economic growth.

According to Chong Hoon Park of Standard Chartered Bank Korea, while the latest Fed interest rate outlook and resulting dollar appreciation may create near-term pressure, they are unlikely to derail BOK's dovish stance.

“The BOK appears committed to prioritizing growth, banking on a solid economic recovery that will attract capital inflows and strengthen the KRW (Korean Won) in the medium term,” Park said.

“Furthermore, the National Pension Service (NPS) stands ready to increase its currency swap lines if necessary to stabilize the KRW. Although this tool has never been used, its availability provides a credible backstop to mitigate dollar strength and protect Korean enterprises from external shocks.”

European markets fell on Thursday after the Fed's comments, to which currency markets also reacted. However, the moves were more subdued than in Asia euro strengthening by approximately 0.5% against the dollar i British pound sterling increases by 0.1% against the dollar. The dollar weakened by approximately 0.4% against the zloty Swiss francMeanwhile.

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

The European Central Bank announced this last week fourth interest rate cut this year, confirming expectations for a quarter of a percentage point move and lowering the 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 would likely be “relatively modest, but not zero,” adding that Trump's policies would have a larger impact on the bank.

“The outlook for the U.S. and euro zone economies over the next year is quite contrasting,” Ryan told CNBC on Thursday, noting that euro zone growth remains volatile and vulnerable to harsh trade policies.

“The biggest impact of Trump 2.0 will be weaker growth,” he added.

Currently, it is clear that the ECB is adopting a more dovish stance further lowering of rates next year, with money markets pricing in a fall in the ECB's key rate by October next year to 1.75% – down from the current 3%.

Should the dollar continue to strengthen? achieve parity However, according to Ryan, the ECB may slow down the pace of easing monetary policy due to the introduction of the euro.

The Swiss central bank continues to cut interest rates and exceeded expectations last week bumper 50 basis points reduction, raising the main rate to 0.5%.

There, the impact of Fed policy could be slightly greater. According to Ryan, a stronger dollar and a weakening of the safe-haven Swiss franc could result in a more hawkish stance from the SNB: but that might not be a bad thing.

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

New central bank governor Martin Schlegel told CNBC's Carolin Roth last week that the bank couldn't rule out a move to negative interest rates in an attempt to ensure inflation “remains within a range consistent with price stability.”

Bank of England kept rates constant as expected at its last meeting this year on Thursday, but markets were surprised by the degree of division among policymakers.

However, there remains a slow pace in bank rate cuts next year, with money markets currently pricing in around 50 basis points of upcoming cuts.

Lindsay James, investment strategy specialist at Quilter Investors, said the impact of the Fed's comments on the Bank of England would likely be minimal, noting there was no market re-pricing after the event.

But she said a higher dollar could have an impact on sterling, increasing inflation in imported goods and ultimately slowing the pace of cuts.

“The reason the Fed is more hawkish is because of the risk from tariffs. “Tariffs result in lower economic growth and lower inflation, which means fewer cuts,” she told CNBC by phone.

“There could potentially be a situation where both sterling and the euro continue to weaken against the dollar, leading to higher imported inflation, especially fuel prices and, to a lesser extent, food prices. This limits banks' ability to reduce interest rates.”