Review of the World Economy in 2025 | A turning point for monetary easing policies in developed economies

In 2025, major central banks around the world will continue to implement monetary easing policies, but in many developed economies, monetary easing has come to an end, and the trend of "stepping on the brakes" is becoming increasingly clear. In the future, in the game of "resilience repair" and "risk retention" in the global economy, major economies' monetary policies may show a differentiated and prudent adjustment trend. Faced with the pattern of "weak growth+slow inflation", central banks around the world are struggling to find a balance in their policy toolbox.

The pace of interest rate cuts by some central banks tends to slow down

On December 10, 2025, the Federal Reserve announced a 25 basis point reduction in the target range of the federal funds rate to between 3.5% and 3.75%. This is the third consecutive rate cut by the Fed since September 2025 and the sixth rate cut since the start of this cycle in September 2024. The Federal Reserve has cumulatively cut interest rates by 75 basis points by 2025.

The Federal Reserve has given a 'vague outlook' on its future policy path after the latest interest rate cut. Analysts point out that as other developed economies pause or end their easing cycles, and some central banks even prepare to raise interest rates, if the Federal Reserve continues to cut interest rates in the future, it may fall into a situation of "acting alone", which will reshape the logic of global capital flows and asset pricing.

The Bank of England also cut interest rates in December. On the 18th, the Bank of England lowered its benchmark interest rate by 25 basis points to 3.75%. This is the sixth consecutive interest rate cut since the start of the rate cut cycle in August 2024, with a cumulative decrease of 150 basis points. The cautious attitude of the Bank of England also implies that the future path of easing will be full of twists and turns and may slow down.

The European Central Bank has shifted from interest rate cuts to an observation period. From June 2024 to June 2025, the European Central Bank has lowered interest rates a total of eight times. In July 2025, the European Central Bank kept the three key interest rates in the eurozone unchanged, marking the first time since June 2024 that it had suspended interest rate cuts until the final interest rate meeting of 2025 on December 18, during which the ECB maintained interest rates unchanged.

Observers believe that the weak economic recovery and falling inflation in the first three quarters of the eurozone have led the European Central Bank into a strategic phase of "extending the observation period". The current policy is neither tightening nor fully shifting towards easing, but maintaining flexibility to leave room for possible economic turning points in the future. Many European economists have expressed that the European Central Bank tends to maintain the status quo in the current trade environment, and the threshold for further interest rate cuts in the future is high. Carsten Brzeski, head of macro research at Dutch International Group, believes that the latest forecast from the European Central Bank shows that the inflation rate in the eurozone will remain stable at around 2% in the next two years, which is in line with its medium-term inflation target. Therefore, there are not many reasons to change the monetary policy stance.

The Bank of Japan is gradually moving away from its long-term ultra loose policy. During the COVID-19, in response to the severe impact of the epidemic on the Japanese economy and market, the Bank of Japan continued to increase monetary policy easing by means of expanding the asset purchase plan. Until March 2024, the Bank of Japan announced the end of its negative interest rate policy and the beginning of its interest rate hike cycle. But since the Bank of Japan raised its policy interest rate from 0.25% to 0.5% in January 2025, it has remained inactive. On December 19th, the Bank of Japan raised its policy interest rate by 25 basis points, which is seen as an important step towards normalizing monetary policy. Although adjusted interest rates remain low globally, Japan is gradually moving away from its long-term ultra loose policy.

Other major economies' central banks have entered an observation period after cutting or raising interest rates. The Bank of Canada will cut key interest rates by 25 basis points four times in 2025, with a cumulative reduction of 100 basis points, and currently maintain the level at 2.25% unchanged. The Reserve Bank of Australia has cut interest rates three times within 2025 and currently maintains the benchmark interest rate at 3.6% unchanged. The Brazilian central bank raised the benchmark interest rate by 25 basis points to 15% in June 2025, and has maintained it at a high level of 15% since then.

Some media comments suggest that there is currently a significant divergence in monetary policies among major economies around the world. However, according to Lawrence Mutkin, a strategist at the Bank of Montreal, Canada, the recent upward trend in the yields of major global treasury bond bonds reflects the market's belief that the cycle of interest rate reduction is coming to an end.

The Federal Reserve's interest rate cuts have multidimensional impacts

The Federal Reserve has cut interest rates by 75 basis points three times this year, triggering a global capital flow restructuring that has multidimensional impacts on personal consumption, corporate financing, and asset allocation.

The Federal Reserve's monetary policy has a wide-ranging impact on the global economy, financial flows, and asset prices through channels such as interest rate changes and balance sheet adjustments. The three interest rate cuts by the Federal Reserve in 2025 have intensified the divergence of global monetary policy; At the same time, the decline in the return on US dollar assets has reduced the attractiveness of the US dollar, triggering international capital to shift from the US to high growth regions such as emerging markets.

The weakening of the US dollar directly reduces cross-border consumption costs, for example, Chinese consumers' spending on studying abroad, traveling, and online shopping has decreased, and the decrease in imported commodity prices has benefited consumers. At the enterprise level, import enterprises have increased short-term profits due to the decrease in procurement costs denominated in RMB, while US dollar debt enterprises have enjoyed reduced financing costs and debt interest expenses; However, export enterprises priced in US dollars may weaken their international competitiveness due to the rise in commodity prices, and raw material import enterprises also need to face the cost increase pressure brought by the rise in commodity prices.

At present, the risk of stagflation in the United States coexists with the risk of foam in the stock market. If the Federal Reserve sharply reduces interest rates due to political pressure, it may aggravate the overheating of technology stocks or inflationary pressure; Meanwhile, the impairment of the independence of the Federal Reserve may shake the credibility of the US dollar and accelerate the diversification process of the monetary system. In addition, the global risk management system needs to adapt to capital flow fluctuations and policy uncertainties, and prevent the huge impact of hot money inflows and outflows on emerging markets.

It is worth noting that the market's expectation of further interest rate cuts by the Federal Reserve next year has further supported the rise in prices of precious metals such as gold. Goldman Sachs analysts stated in a research report that the continued buying of gold by central banks, coupled with private investor funds flowing into gold ETFs against the backdrop of the Federal Reserve's continued easing, is expected to drive gold prices to $4900 per ounce by the end of 2026.

Major economies may end their interest rate cut cycle next year

At present, there is a significant divergence in monetary policy expectations among major developed economies worldwide. Market pricing shows that the Federal Reserve and the Bank of England are currently the only two major central banks expected to continue implementing interest rate cuts before the end of 2026, while most other central banks, including the European Central Bank, the Bank of Japan, the Bank of Canada, the Reserve Bank of Australia, the Reserve Bank of New Zealand, and the Swiss National Bank, are priced by the market as the direction of interest rate hikes.

Goldman Sachs pointed out that this policy differentiation pattern may have a profound impact on the global foreign exchange market, and is expected to have a key impact through the exchange rate market around 2026, with the US dollar and pound possibly under pressure due to relatively loose monetary policies. Some American media pointed out that Wall Street generally believes that the Federal Reserve will cut interest rates in 2026, and Deutsche Bank and Goldman Sachs expect the US dollar to continue to weaken in 2026. While the Federal Reserve continues to cut interest rates, central banks such as Europe and Japan tend to maintain interest rates or even raise them, which will weaken the attractiveness of US dollar assets.

However, some analysts believe that the space for the Federal Reserve to cut interest rates in the future may be limited. In its latest economic outlook report, the OECD points out that the impact of US tariff policies on the global economy is becoming increasingly apparent, and is being transmitted to expenditure choices, business costs, and consumer prices. The report shows that the total value of imported goods subject to tariffs in the United States has significantly decreased compared to non taxable imported goods, indicating that tariffs are suppressing overall demand in the United States, and it is expected that its trade volume will continue to be under pressure. Considering the cooling job market and rising consumer prices due to tariffs, it is expected that household consumption growth in the United States will continue to slow down, and inflation may become more persistent, thereby reducing the Federal Reserve's room for interest rate cuts.

Aditya Bawei, a senior economist at Bank of America, predicts that after the interest rate cut in December 2025, Federal Reserve Chairman Powell will no longer cut interest rates during his tenure. Bawei believes that interest rates in the United States are likely to be at an appropriate level now, and lowering interest rates below 3.5% will bring risks, pushing up inflation levels and risk asset prices. DBS Bank stated in its latest Economic Weekly that it expects the Federal Reserve to maintain a dovish stance in the coming year, with an additional interest rate cut expected in 2026.