Introduction to 2026 Monetary Policy
After a year of diverging paths taken by central banks around the world in 2025, all signs point to somewhat more stability in monetary policy in 2026. However, the recent arrest of Nicolás Maduro by the United States may have repercussions on oil prices and, consequently, on inflation and the actions of central banks.
Focus on the U.S. Federal Reserve
The focus will be on the U.S. Federal Reserve, whose chair, Jerome Powell, reaches the end of his term in April, amid doubts about the future independence of the institution. A member of the Federal Open Market Committee, Lisa Cook, is also entangled in legal proceedings. According to Bret Kenwell, Market Analyst at eToro in the U.S., "The Fed has many factors at play in 2026. Not only will a new chair take over, but the macroeconomic outlook remains uncertain. The labor market appears to be cooling without collapsing, while inflation remains stable." Kenwell questions whether the U.S. monetary authority "will be able to adopt a dovish tone if these factors persist in 2026, or whether its dual mandate will keep moderate measures in check."
Challenges Facing the Fed
Ray Sharma-Ong, Deputy Global Head of Bespoke Multi-Asset Solutions at Aberdeen Investments, holds a similar view, believing that "the Fed is between a rock and a hard place, with inflation remaining high despite a weakening labor market." This disconnect "has widened the divisions within the Committee." Sharma-Ong notes that the Fed’s monetary policy is no longer a catalyst for the markets, as federal funds interest rates between 3.5% and 3.75% are considered within the effective range of neutrality. As a result, the bar for new cuts is very high, implying that the monetary policy outlook is likely to remain static for some time.
Economic Outlook and Rate Cuts
Paolo Zanghieri, Senior Economist at Generali AM, part of Generali Investments, believes that the economy continues to enjoy a solid foundation, but downside risks to employment remain more important to the FOMC than upside risks to inflation. Following the December rate cut, "it can now wait for more data before deciding on the extent and pace of further rate cuts." Zanghieri’s outlook is clear: the projected path for the official interest rate has not changed since September, with two more cuts of 25 basis points, one next year and another in 2027.
European Central Banks
In Europe, central banks have done significant work to reduce global inflation. Nachu Chockalingam, Head of Credit at Federated Hermes, expects official interest rates to fall but remain slightly above pre-pandemic levels, especially in developed market economies. The Federal Reserve and the Bank of England will continue cutting rates, but the direction the European Central Bank (ECB) will take is less clear, given that inflation in the eurozone is nearing the 2% target.
Bank of England and Scandinavian Monetary Authorities
The Bank of England (BoE) will also generate market attention throughout 2026. David A. Meier, Economist at Julius Baer, expects two rate cuts from the BoE and a wait-and-see approach from Scandinavian monetary authorities. Meier forecasts two more cuts in 2026 and maintains a neutral outlook for the pound sterling. He also outlines his expectations for the Nordic central banks, with Sweden’s Riksbank keeping the policy rate at 1.75% and the Norges Bank keeping rates at 4% due to persistent inflation.
Japan’s Monetary Policy
Regarding Japan, Álvaro Peró, Fixed Income Investment Director at Capital Group, reveals that reflation continues amid positive economic growth and inflation above target. The Bank of Japan (BoJ) has reiterated the need for further hikes in a context of yen weakness and reflationary pressures. Homin Lee, Senior Macro Strategist at Lombard Odier, expects interest rates in Japan to continue rising in 2026, with two interest rate hikes likely, the first in January.
Latin America’s Economic Outlook
Forecasts also extend to the largest Latin American economy: Brazil. At DWS, they suggest that the Central Bank of Brazil "appears willing to maintain its aggressive stance" and indicate that structural reforms, following next year’s elections, "could help unlock the country’s potential." Yi Li-Hantzsche, Emerging Markets Analyst at DWS, acknowledges that so far, Brazil’s central bank has shown an unwavering commitment to bringing inflation back to target, despite pressure from the government.
Conclusion
In conclusion, the monetary policy landscape in 2026 is expected to be more stable compared to 2025, with central banks around the world adjusting their policies to address inflation, employment, and economic growth. The U.S. Federal Reserve, European Central Bank, Bank of England, and Bank of Japan will be closely watched as they navigate the complexities of monetary policy. While there are challenges and uncertainties, experts believe that with careful management, the global economy can continue to grow and prosper. As the year unfolds, it will be essential to monitor the actions of central banks and their impact on the global economy.
