Trump is about to make an appearance! Global central banks must also be cautious about interest rate cuts in 2025

According to the Zhitong Finance APP, global central bank governors are expected to further cut interest rates in 2025, but will proceed with caution and closely monitor the policies of the incoming U.S. President Donald Trump. Although nearly all major economies are expected to implement monetary easing in the coming year, the pace may slow down. Bloomberg Economics predicts that the total interest rate in developed countries will only decrease by 72 basis points in 2025, down from the level in 2024.

The changes in this indicator suggest that the easing cycle is underway, with persistent concerns about inflation pressures that may still need to dissipate, while Trump's upcoming second term will also bring many unknown factors.

For central bank governors around the world, the next U.S. president is an undeniable presence. If implemented with the intensity advocated by Trump, the resulting trade tariff threats could harm economic growth and drive up consumer prices in the face of retaliation from various countries.

Domestically in the U.S., the Federal Reserve has shifted its focus to the risks of rising inflation, temporarily suppressing the prospect of significant monetary policy easing. Other major countries, from the Eurozone to the UK, are also prepared to continue lowering borrowing costs to support economic growth, but there are no signs of urgency to take action.

Among the 23 central banks of most concern, only two may raise interest rates by the end of the year. Japan's rate hike cycle may continue, while Brazilian officials remain determined to take action to curb fiscally driven inflation.

Tom Orlik, Chief Economist at Bloomberg Economics, stated, "For central banks on the path to policy normalization, the last mile will not be smooth. The imbalanced progress towards 2% inflation, the impact of the incoming Trump administration, and the uncertainty of neutral interest rates all increase the likelihood of surprises. Bloomberg Economics expects the average interest rate of central banks in developed economies to rise from 3.6% at the end of 2024 to 2.9% at the end of 2025. Sometimes even a short distance can be difficult to traverse."

Here is the outlook from foreign media on the monetary policies of some central banks in the coming year:

Federal Reserve

The current upper limit of the Federal Funds Rate is 4.5%, and Bloomberg Economics predicts it will be 3.75% by the end of 2025. The market's expectations for a 25 basis point rate cut before March remain stable, and expectations for a rate cut before June are completely consistent, with the likelihood of a second rate cut before the end of the year approaching 70%.

In December of last year, the Federal Reserve cut rates again by 25 basis points, but new forecasts show that many policymakers believe this is sufficient, and for at least a few months, they are pressing the pause button. Policymakers have only hinted at a 50 basis point cut by 2025 Just a few months ago, there were signs of a near collapse in the U.S. labor market, and now the Federal Reserve's attention has firmly returned to inflation, which seems to have stagnated above the 2% target. Federal Reserve Chairman Jerome Powell has made it clear that officials must see new progress in this area before taking action again.

Powell expressed considerable confidence that monetary policy will still be a meaningful restrictive policy and that inflation will continue to decline. However, based on new inflation forecasts and predictions for the neutral interest rate (i.e., a policy that neither helps nor harms the economy), several Federal Reserve officials appear to be more skeptical.

As we enter 2025, this creates a highly tense atmosphere for the committee, and another source of pressure is also emerging: Donald Trump.

The elected president favors low interest rates and soaring stock markets, both of which have been hit following the Federal Reserve's recent decisions. He may be further irritated by the widening gap between U.S. and Eurozone benchmark rates, which is expected to expand by 2025.

Bloomberg Economics analyst Anna Wong stated that the Federal Open Market Committee (FOMC) took a hawkish stance at its last meeting in 2024, disappointing market expectations, as a 50 basis point rate cut is anticipated in 2025. Due to seasonal factors, inflation data at the beginning of 2025 may remain robust. Nevertheless, we believe that as the unemployment rate continues to rise, the Federal Reserve will ultimately have to cut rates by 75 basis points in both 2025 and 2026, with the unemployment rate expected to reach 4.7% and 5.0% by the end of 2025, respectively.

European Central Bank

The European Central Bank's deposit rate is 3%, and Bloomberg Economics predicts it will reach 2% by the end of 2025. Traders expect a 25 basis point rate cut this month, with three more cuts expected by the end of June and a 25% chance of five cuts by the end of the year.

After a slow start, the European Central Bank has begun to steadily cut rates, potentially reducing the deposit rate to 2% with consecutive 25 basis point cuts by mid-year. Although some officials have suggested the option of taking more significant action, most believe there is no need to accelerate the pace.

While the overall inflation rate is expected to stabilize at the European Central Bank's 2% target by 2025, the increase in service prices remains nearly double this level, raising concerns about wages, which hinder policymakers from sounding the alarm. Supported by a rebound in private spending, economic growth is expected to recover after experiencing a winter stagnation.

Bloomberg Economics analyst David Powell stated, "Signs of slowing GDP growth in Europe have already emerged, and we expect that as investment decisions are postponed, the threat of tariffs will put pressure on economic activity. By early 2025, the overall inflation rate will be below the 2% target, wage growth is slowing, and profit margins have stopped expanding Restrictive policies have become difficult to justify, and we expect consecutive interest rate cuts before March, followed by quarterly cuts until deposit rates reach 2%. This is our estimate of neutrality.”

Bank of Japan

The Bank of Japan's target interest rate (upper limit) is 0.25%, and Bloomberg Economics predicts it will reach 1% by the end of 2025. The money market is betting on a gradual tightening of policy, expecting a 25 basis point rate hike before May, with another hike by the end of the year.

Bank of Japan Governor Kazuo Ueda faces a tough decision on the timing of the next rate hike. Inflation has remained at or above the Bank of Japan's 2% target for more than two and a half years. With economic growth, this seems to be a sufficiently long period to raise rates from lower levels. A rate hike would also help support the struggling yen.

However, the January meeting will take place four days after Trump's inauguration, and Ueda has listed Trump's policies as one of the major uncertainties to be cautious about. By March, Ueda will have a clearer understanding of the U.S. economy and domestic wage trends. This will also give Prime Minister Shigeru Ishiba's minority government more time to pass the budget.

Ultimately, the yen may become a decisive factor.

Bloomberg Economics analyst Taro Kimura commented, “We expect Ueda to lay the groundwork for a rate hike in January at the December meeting. It turns out he did not do so, and his cautious attitude indicates that the Bank of Japan wants to retain some room for maneuver when market and political conditions are favorable. We still firmly believe that the Bank of Japan will raise rates in January, as inflation increasingly looks likely to remain near the Bank of Japan's 2% target, and the yen's plunge will also increase upside risks.”