Central Banks Shift Their Stance
In 2025, the world’s leading central banks made a significant change in their approach to interest rates. After years of focusing on fighting inflation, they began to cut interest rates aggressively. This move was made in response to easing price pressures and growing concerns about the economy.
A Global Effort
Nine out of the ten most influential central banks, including the U.S. Federal Reserve, the European Central Bank, and the Bank of England, cut their benchmark interest rates. Other countries that followed this trend include Australia, New Zealand, Canada, Sweden, Norway, and Switzerland. Together, they implemented 850 basis points of easing through 32 rate cuts, which is the highest number of reductions since 2008 and the most significant cumulative easing since 2009.
Reasons Behind the Shift
The shift in the central banks’ stance marks a sharp reversal from 2022 and 2023. During those years, policymakers rapidly raised borrowing costs to curb surging inflation following Russia’s invasion of Ukraine and the resulting spike in energy prices. However, as inflation eased and growth concerns resurfaced, the central banks changed their approach to support the economy.
Exceptions and Future Outlook
Japan stood out in 2025 by raising interest rates twice. Some economists predict that the pace of easing may slow down in 2026, with several major central banks already adopting a more cautious tone. Countries like Canada and Australia have begun signaling that rate hikes could be reconsidered in the future. According to James Rossiter, head of global macro strategy at TD Securities, "We think the ECB will hike next year and the RBA and BOC will get close to it."
Impact on the United States
In the United States, the Federal Reserve faces a complex outlook due to shifting labor market and inflation trends. JPMorgan’s head of global macro research, Luis Oganes, noted that "During the course of 2025, we had this dynamic of the Fed in every meeting, either going to stay put or cut; we were never discussing hikes." However, he expects this to change in 2026, particularly in the second half of the year, with a more two-sided risk.
Emerging Markets
In contrast to developed economies, emerging markets continued to cut interest rates at a rapid pace. Eight central banks from a sample of 18 emerging markets delivered a combined 350 basis points of easing in December. This brought the total easing in emerging markets in 2025 to 3,085 basis points across 51 rate cuts, surpassing the 2,160 basis points delivered in 2024. According to Giulia Pellegrini, managing director at Allianz Global Investors, "You had inflation being kept under control, much more so than even in developed markets, with a much more proactive set of policy makers."
Conclusion
In conclusion, the world’s central banks have made a significant shift in their approach to interest rates, cutting them aggressively to support the economy. While the pace of easing may slow down in 2026, emerging markets are expected to continue their easing trend. As the global economy navigates these changes, it will be important to monitor the actions of central banks and their impact on the economy. With inflation under control and growth concerns resurfacing, the central banks’ decisions will play a crucial role in shaping the future of the global economy.
