Introduction to Central Banks’ New Stance
Central banks in big economies are changing their approach, with many now holding steady after a long period of easing, and policymakers warning that their next moves could be rate hikes if inflation starts to rise again. This shift is significant as it may impact the global economy and financial markets.
Overview of Current Monetary Policies
The European Central Bank has all but confirmed that it is done with monetary easing, while the Bank of England cut rates in a narrow vote, with some policymakers cautioning about price pressures. Markets still expect more U.S. monetary easing next year, but some Federal Reserve policymakers have also warned that the world’s biggest economy might already be running too hot.
Country-Specific Monetary Policies
Switzerland
The Swiss National Bank left its policy interest rate unchanged at 0% on December 11, the lowest among developed-market central banks. The recent agreement to reduce U.S. tariffs on Swiss goods has improved the economic outlook. Although Swiss inflation is at zero due to the strong safe-haven franc lowering import costs, the bar for bringing rates into negative territory is high. Economists expect price growth to recover mildly next year, and the SNB is likely to stay on hold throughout 2026.
Canada
The Bank of Canada held its key rate at 2.25% last week, after 225 basis points of easing this cycle. Governor Tiff Macklem said the economy was proving resilient to U.S. trade measures. The BoC is expected to keep rates on hold until 2027, after government spending and robust oil exports lifted third-quarter growth to 2.6% and the labor market strengthened.
Sweden
Sweden’s Riksbank expects previous monetary easing to begin lifting GDP growth, and with year-on-year inflation running just above its 2% target, it held rates at 1.75% on December 18. Analysts anticipate it will hike again in late 2026.
New Zealand
The Reserve Bank of New Zealand’s new boss, Anna Breman, faces a tough choice in turning hawkish, given the high unemployment rate. However, with a string of rate cuts having helped propel inflation to the top end of the central bank’s target range, money markets see New Zealand’s cash rate nearing 3% by December 2026 from 2.25% currently.
Euro Zone
The European Central Bank has been firmly on hold at 2% since June and its latest pause came with upgrades to growth and inflation forecasts. Traders did not make strong bets for monetary tightening, however, after ECB President Christine Lagarde cited heavy uncertainty and avoided forward guidance.
United States
The Federal Reserve cut rates on December 10 in a divided vote, then hinted at a pause. Delayed jobs data showed that the labor market had declined in October, then snapped back the following month. U.S. business leaders also expect further price rises from tariffs. Fed policymakers predict just one 25 bps cut in 2026, which may spark disagreements with U.S. President Donald Trump, who wants more easing.
Britain
Bank of England rate-setters voted narrowly for a quarter-point cut to 3.75% and Governor Andrew Bailey warned that future easing was a close call. Although the British government’s tax-hiking November 26 budget has soured economic sentiment and is expected to dampen inflation next year, the BoE’s dissenters were concerned about price growth getting stuck too high.
Norway
The Norges Bank has been the most cautious in the G10 pack, having cut rates by just 50 bps this cycle. It held borrowing costs steady, although futures markets anticipate 44 bps of further easing next year after inflation cooled off.
Australia
The Reserve Bank of Australia looks like it will be the first to reach a turning point. On Tuesday, it held rates steady at 3.6%, ruled out further policy easing, and warned its next move could be up if inflation pressures prove to be stubborn. This gave the Australian dollar a boost and weighed on government bonds. Markets are fully pricing a hike by June 2026, and see a good chance it will come in May.
Japan
The Bank of Japan, the sole central bank in hiking mode for now, is set to raise rates to 0.75% at its meeting. Japanese markets are in focus globally, with Prime Minister Sanae Takaichi’s announcement of massive stimulus sending longer-dated government bond yields surging, with spillovers elsewhere, while the yen is under pressure.
Conclusion
In conclusion, central banks in big economies are shifting their stance, with many holding steady after a long period of easing. Policymakers are warning that their next moves could be rate hikes if inflation starts to rise again. This change in approach may have significant implications for the global economy and financial markets. As the economic landscape continues to evolve, it will be essential to monitor the actions of central banks and their impact on the economy.
