World’s Central Banks Slash Rates at Year End, Japan Bucks Trend
President Donald Trump's protectionist stance intensified following his inauguration, with sweeping tariff implementations in March and April that triggered seismic shockwaves across international markets and amplified economic volatility.
China, Japan, the EU, Canada, and Mexico bore the brunt of Washington's trade barriers, emerging as focal points in the escalating commercial conflict.
Though tensions eased moderately during the year's latter half through negotiated trade pacts, a 12-day aerial bombardment exchange between Iran and Israel—coupled with stalled peace efforts in the Russia-Ukraine conflict—kept investors wary about future growth prospects.
A budget impasse triggered a US federal government closure beginning Oct. 1. The 43-day paralysis—the nation's lengthiest on record—severely hampered economic data collection throughout the third quarter.
This year witnessed substantial rate reductions: the US Federal Reserve slashed 75 basis points, the European Central Bank (ECB) dropped 100 basis points, the Bank of England (BoE) cut 100 basis points, the Reserve Bank of Australia reduced 75 basis points, and Türkiye's Central Bank delivered massive cuts totaling 950 basis points. Conversely, the Bank of Japan (BoJ) tightened by 50 basis points.
Fed Navigates Employment-Inflation Tightrope
The Fed exercised measured restraint amid a complex economic landscape dominated by policy challenges.
Tariff-driven uncertainty and the government shutdown's ripple effects amplified inflation concerns, which dominated discussions through year-end.
Fed policymakers remained divided—some advocated cautious deliberation and additional data analysis before acting, while others argued conditions warranted immediate rate reductions.
The central bank implemented three consecutive 25-basis-point cuts in September, October, and December, culminating in 75 basis points of total easing and a 3.5-3.75% policy range.
Market forecasts anticipate two 25-basis-point reductions in March and July 2026.
Fed Chair Jerome Powell's successor remains undetermined as his tenure approaches its conclusion.
ECB Delivers Aggressive Easing Campaign
The ECB concluded 2025 with 100 basis points of cumulative cuts across its three benchmark rates, though expectations for continued easing in the coming year appear constrained.
Eurozone annual inflation declined to 2.1% in November, approaching the bank's 2% medium-term objective.
ECB President Christine Lagarde acknowledged at this month's final policy meeting that inflation trajectory uncertainties linger due to turbulent global conditions.
Lagarde noted that declining energy costs might temporarily suppress price growth, but warned that supply chain disruptions, wage acceleration, and extreme weather events present upward inflation risks.
While the ECB might occasionally raise rates ahead, officials will closely track how defense expenditures and fiscal stimulus measures influence domestic demand equilibrium.
BoE Pursues Measured Easing; Japan Hits Three-Decade Rate Peak
The BoE reduced rates by 100 basis points cumulatively to stimulate expansion despite persistent inflation threats.
UK annual inflation registered 3.2% in November, while the bank's policy rate stood at 3.75%.
The BoE maintained restrictive monetary conditions to keep rates above inflation levels.
The BoE is projected to execute its first rate reduction in April amid continuing uncertainties.
Meanwhile, in Japan, the BoJ implemented 50 basis points of cumulative increases confronting mounting inflation risks and prospects of sustained wage growth.
The BoJ's policy rate climbed to 0.75%—a three-decade high. The bank indicated wages and prices should rise gradually, while real interest rates remain below zero and accommodative financial conditions support economic expansion.
Japan's annual inflation measured 2.9% in November. Markets lack clear expectations regarding the BoJ's 2026 trajectory.
The BoJ is anticipated to deliver its first rate increase of next year in September.
The Bank of Korea concluded the year with 50 basis points of total cuts, establishing its policy rate at 2.5%.
Oceania Pursues Accommodative Path
The Reserve Bank of Australia cut rates by 75 basis points cumulatively this year, positioning its policy rate at 3.6%.
The bank implemented 25-basis-point reductions in February, May, and August.
Money market estimates increasingly reflect the possibility of renewed tightening next year.
Projections suggest a 25-basis-point hike in May.
The Reserve Bank of New Zealand delivered 200 basis points of total cuts this year, lowering its policy rate to 2.25%.
Türkiye's Central Bank Executes Dramatic Easing
The Turkish Central Bank convened approximately 10 Monetary Policy Committee sessions this year, plus one interim meeting, slashing rates by 950 basis points cumulatively to establish a 38% policy rate.
Türkiye's inflation battle persisted throughout the year. The nation's consumer price index advanced 0.87% monthly in November—the smallest increase in 30 months—and 31.07% annually, marking the lowest year-over-year reading in four years.
The country's economic strategy propelled growth for 21 consecutive quarters while advancing its disinflation objectives.
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