current
Monetary Policy Uncertainty
Central banks are navigating a complex environment, balancing inflation concerns with the impact of fiscal policy and geopolitical risks.
Timeframe
near-term
Categories
Subcategories
Impact areas
Detailed Analysis
Major central banks are expected to continue cutting interest rates in 2025, but the path to terminal rates is uncertain. While inflation is broadly falling, factors such as fiscal stimulus, protectionist trade policies, and geopolitical risks could keep inflation higher for longer. This creates a challenging environment for central banks, who must balance the need to control inflation with the potential negative impact of higher interest rates on economic growth. The report notes that "whilst we expect G3 central banks to reach terminal rates before the end of H1, these rates will be much higher than the levels settled at in previous cutting cycles, and the destination could differ significantly across regions."
Context Signals
The Fed is expected to cut rates by 50 basis points in 2025, with most of the easing occurring in Q1.
The Bank of England faces the challenge of fitting monetary policy to a new government's fiscal commitments.
The European Central Bank is expected to cut rates to a terminal rate of 2.0% in the first half of 2025.
Edge
The divergence in terminal rates across different regions could lead to increased volatility in currency markets.
Central banks may need to adopt unconventional monetary policy tools to address the challenges posed by fiscal dominance and protectionism.
The uncertainty surrounding monetary policy could make it more difficult for businesses to make investment decisions and plan for the future.
