Central Banks Slash Interest Rates in 2025
Introduction to Interest Rate Cuts
Major central banks have delivered interest rate cuts in 2025 at the fastest clip and largest scale since the financial crisis. This move has been seen across the globe, with nine of the central banks overseeing the 10 most heavily traded currencies lowering their benchmark lending rates. These banks include the U.S. Federal Reserve, the European Central Bank, and the Bank of England, as well as Australia, New Zealand, Canada, Sweden, Norway, and Switzerland.
The Extent of Easing
The extent of easing is significant, with 850 basis points in easing across 32 rate reductions this year. This is the biggest number of cuts since 2008 and the biggest scale of easing since 2009. This marks a sharp reversal from 2022 and 2023 when policymakers ramped up rates to combat inflation as energy prices soared following Russia’s invasion of Ukraine. Japan proved the exception this year, hiking rates twice.
Change in Tone Ahead of 2026
Some analysts expect that 2026 might bring a sea change, noting that recent months had already seen a distinct change in tone from several G10 central banks, especially Canada and Australia. This change in tone raises the specter of rate hikes to come. 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."
The Fed’s Challenges
The Fed meanwhile faces changing cross currents of labor market and inflation dynamics. 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, Oganes expects that "during the course of 2026 that’s probably going to change, and particularly in the second half of the year, you’re going to have a little bit more of a two-sided risk."
Easing Momentum in Developing Nations
The slowdown in easing momentum also became apparent in monthly data. Of the nine central banks that met in December, only the Fed and the Bank of England cut rates, and Japan hiked. However, across developing nations, rate cuts still came hard and fast in December. Eight central banks from a Reuters sample of 18 developing economies delivered 350 bps of cuts.
Inflation Under Control
In developing economies, inflation has been kept under control, much more so than in developed markets. 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 policymakers." This has led to a significant easing effort, with 3,085 bps of easing across 51 moves, the biggest easing effort since at least 2021.
Conclusion
In conclusion, 2025 has seen a significant shift in the monetary policy stance of central banks, with a sharp reversal from the rate hikes of 2022 and 2023. As we look ahead to 2026, analysts expect a potential change in tone, with some central banks potentially hiking rates. However, in developing economies, easing is expected to continue, with many countries still having room to cut rates. The outlook for 2026 is uncertain, but one thing is clear: central banks will continue to play a crucial role in shaping the global economy.
