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On December 19, 2023, the Federal Reserve, the Bank of Japan, and the Bank of the United Kingdom will announce their interest rate decisions. The decisions of these central banks at the end of the year will set the tone for monetary policy in 2025, with inflation, economic growth, and global uncertainty influencing their decisions.

The Federal Reserve has hinted at slowing the pace of interest rate cuts.

The market widely expects that the Federal Reserve will lower the benchmark interest rate by 25 basis points. According to the CME Group's FedWatch tool, the market anticipates a 97% probability of a rate cut. This will be the Federal Reserve's third consecutive rate cut following September and November.

However, Federal Reserve policymakers have indicated that the pace of rate cuts may slow in 2025, with persistent inflation and stronger-than-expected economic growth being the main reasons for the Fed's hawkish stance. The inflation rate remains above the Fed's 2% target, although it is far lower than the peak of 9.1% in 2022, but inflation has proven to be more resilient than expected.

Meanwhile, thanks to strong Consumer spending and a resilient labor market, the US economy grew at a year-on-year rate of 2.8% in the third quarter of 2024. These factors have made the Federal Reserve hesitant about overly aggressive easing policies. Federal Reserve Chairman Jerome Powell is expected to emphasize in his post-meeting comments that the Fed's future decisions will still be data-driven.

Analysts predict that the Federal Reserve will cut rates more slowly in 2025, possibly not in consecutive cuts, but pausing after one cut to observe changes in economic data. The futures market currently predicts the Federal Reserve will cut rates twice in 2025, down from the previous forecast of four times.

Chairman Powell's wording will be the most important clue. The Federal Reserve Chairman may wish to appear more hawkish as progress is made on inflation, and may also downplay the influence of the US government to keep the market calm.

Will the Bank of Japan unexpectedly raise interest rates?

The Bank of Japan will conclude its two-day meeting on December 19, and there is a divergence in the market regarding whether it will raise interest rates soon. The current benchmark interest rate in Japan is 0.25%, which has remained unchanged since July.

A CNBC survey found that 54% of economists expect the Bank of Japan to maintain interest rates this week, with a potential hike in January 2025.

Driven by wage growth and rising prices, Japan's inflation rate has remained above the Bank of Japan's target of 2% for 30 consecutive months. Normal wages are growing at a rate of 2.5% to 3% per year to support household expenditure. However, there are still concerns about the sustainability of wage growth, especially among small and medium-sized enterprises.

Bank of Japan Governor Kazuo Ueda stated that another interest rate hike is 'coming soon,' but the uncertainty of U.S. policies and the upcoming spring wage negotiations may prompt the Bank of Japan to wait.

Currently, the exchange rate of the dollar against the yen is about 154, which is key to the Bank of Japan's decision-making. The depreciation of the yen has boosted Japan's exports and tourism, but there is also a risk of exacerbating inflation. In the future, due to the continued divergence of monetary policies among countries, there is a high likelihood of the yen strengthening.

Bank of England: Too much uncertainty.

Following the interest rate cuts in August and November, the Bank of England is expected to maintain the benchmark interest rate at 4.75% in this week's meeting.

Despite inflation dropping below the Bank of England's target of 2% earlier this year, the inflation rate surged to 2.3% in October, and it's expected to rise further to 2.7% in November. The unexpected rebound driven by rising energy costs complicates the Bank of England's path to easing.

Additionally, the fiscal policy changes introduced in the Labour Party's budget have increased inflationary pressures. The increase in National Insurance Contributions (NIC) for employers in the budget is a major issue, as it raises business costs and may further lead to price increases or layoffs in low-profit industries such as retail and hospitality.

Analysts expect the Bank of England to cut interest rates four times in 2025, with the benchmark rate falling to 3.75% by the end of the year. However, if inflation remains persistently high, the risk of smaller rate cuts increases.

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编辑/jayden