If 2023 marks a decisive turning point for major Global central banks to shift towards easing MMF policy, then 2024 will face the impact of high uncertainty and the long reality of the anti-inflation 'final mile'.

Looking back at 2024, as significant progress was made in the fight against inflation, most major central banks cautiously initiated a rate-cutting cycle, except for the Bank of Japan, which remained at odds with the Global trend. However, differing economic conditions across regions meant that the major central banks did not move in unison, and with the 2024 elections, policymakers faced many uncertainties.

Looking ahead to 2025, against the backdrop of divergent growth across regions and risks including Trump's return and political turmoil in Germany and France, economic and political factors are expected to become the main considerations for major central banks in formulating monetary policy.

Historical tightening suppresses inflation, and the interest rate cut cycle officially begins.

In the first half of 2024, to curb inflation, major global central banks maintained a 'higher for longer' stance after raising interest rates to historic highs, keeping rates in a restrictive Range to drive inflation closer to target. However, at the same time, economic growth was also affected, and the ability to achieve a 'soft landing' became another factor that most central banks needed to weigh.

In the second half of the year, as inflation and economic growth continue to slow down, the Swiss National Bank took the lead in lowering interest rates, paving the way for a global easing cycle.

Among the top 10 developed market central banks globally, 7 have lowered interest rates this year, with only Australia and Norway maintaining their rates unchanged. Japan, on the other hand, is in a rate hike mode.

However, the path of interest rate cuts is not smooth, as a 'soft landing' has not become the mainstream narrative for all countries, and Trump's return to power has reignited concerns about inflation among policymakers and the market. Additionally, the chaotic politics in various countries are affecting economic growth prospects, making it seem like the global easing path has reached another crossroads.

The following are the trends in monetary policy direction for major global central banks in 2024, compiled by Zhitong Finance APP:

Federal Reserve

In 2022 and 2023, the Federal Reserve aggressively raised interest rates to combat soaring inflation. After holding steady for eight consecutive meetings, it finally announced a 50 basis point cut in September this year, officially initiating a rate cut cycle, and subsequently lowered rates by 25 basis points in the past two meetings, totaling a cumulative cut of 100 basis points in 2024.

The gradual easing of inflation and cooling of the labor market are reasons for the Federal Reserve to begin cutting interest rates, but the timing in September is significantly later than the market's expectation of March earlier this year. According to the Federal Reserve, this is because signs of cooling in the labor market only began to appear mid-year.

In the first six months of this year, inflationary pressures persisted, and the labor market remained at a healthy level, with new job creation falling below 0.2 million only in April, while the unemployment rate did not rise over 4% until May. This gave the Federal Reserve enough confidence to keep the target range for the federal funds rate at the historically high level of 5.25% to 5.5% to respond to any unexpected market situations.

However, the wording of the Federal Reserve began to change subtly in July. The monetary policy statement released on July 31 included adjustments to the descriptions of the labor market and inflation, suggesting that the central bank may be approaching a rate cut. The statement noted that inflation is gradually moving toward the Federal Reserve's 2% target, and the risks of achieving price stability and maximum employment are becoming more balanced. Chairman Powell also mentioned the timing of a rate cut in September during the subsequent press conference.

As the non-farm payrolls data in July indicated further cooling in the labor market, the Federal Reserve officially began its rate cut cycle in September. Powell also explicitly stated at the press conference that the primary purpose of this rate cut is to stabilize the labor market.

However, although the Federal Reserve unexpectedly cut rates by 50 basis points, Powell emphasized that this does not mean the expectation of a recession is intensifying.

By the end of the year, the US economic growth rate was still above 3%, inflation was also above the 2% target level, the unemployment rate remained very low, and both the stock market and housing prices were at historical highs. Although the Federal Reserve has lowered rates by 100 basis points, compared to the rapid and large-scale rate hikes with the fastest pace in 40 years in 2023, the gap between the last rate hike and the first rate cut lasted 14 months—much longer than the average gap of about 6 months in the last 50 years; the stance of the Federal Reserve is not dovish. The policy rate remains in a restrictive range, still some distance from the so-called neutral rate.

Even in this year's final meeting, Powell sent a hawkish signal, stating that while US inflation has significantly cooled, the pace of recent progress is 'frustrating' and 'slower than we expected.'

According to CME's FedWatch Tool, the market expects that interest rates will remain unchanged in January and March next year, with a resumption of rate cuts only in May, and the probability is only 46.2%.

In terms of balance sheet reduction, the Federal Reserve has steadily advanced throughout the year, with the balance sheet size now falling below 7 trillion USD.

Currently, the market is more focused on when the Federal Reserve will end the balance sheet reduction. Although the Federal Reserve has initiated a rate-cutting cycle, the balance sheet reduction has not yet stopped, which means the Federal Reserve has not truly entered an easing cycle.

As of last Friday, the balance of the Federal Reserve's overnight reverse repurchase agreements (ON RRP) fell to 98 billion USD, the lowest level since April 2021, down from a peak of 2.4 trillion USD at the end of December 2022. Meanwhile, last Wednesday, officials lowered the RRP tool rate by 5 basis points compared to the lower limit of the target range.

As part of quantitative tightening (QT), the Federal Reserve has now removed 2.1 trillion USD of liquidity from the market, and essentially all of the withdrawal has come from ON RRP rather than reserves.

Currently, the interest on reserves (IOR) rate is 4.40%, with reserves reaching 3.28 trillion USD, still at the level when the Federal Reserve initiated QT in the summer of 2022. For reserves, QT has not even begun, and there may still be some way to go before reaching the Federal Reserve's target of 'adequate' levels.

Ahead of the Federal Reserve's November policy meeting, major Wall Street banks surveyed by the New York Fed expect QT to conclude in May next year, at which point the Federal Reserve will maintain its balance sheet at around 6.4 trillion dollars.

European Central Bank

Compared to the Federal Reserve, the European Central Bank's stance is more dovish. Last year, the European Central Bank was slow to respond to rising inflation and one could say it delayed stopping interest rate hikes. However, now the European Central Bank seems determined to stay ahead in policy and quickly restore rates to neutral levels.

Before June, due to inflation still being above target levels, the European Central Bank, like the Federal Reserve, kept interest rates high and unchanged. The difference is that the Eurozone economy seems unable to bear the pressure of tightening policies.

In fact, constrained by tight monetary policies and the energy crisis triggered by the Russia-Ukraine conflict, the Eurozone economy has already shown signs of weakness in 2023. Although the GDP growth of the Eurozone's 20 countries has rebounded this year, the two major economies, France and Germany, are still struggling to recover. Notably, after five years of stagnation, Germany's current economic scale is 5% smaller than its pre-pandemic growth trend.

Weak economic growth has reinforced the European Central Bank's commitment to its easing plans. The European Central Bank "jumped the gun" on the Federal Reserve by initiating rate cuts in June and subsequently cut rates three times in the next four meetings, resulting in a total easing of 100 basis points.

The President of the European Central Bank, Lagarde, pointed out at the press conference following the December interest rate decision that the Eurozone economy is losing momentum and the risks to economic growth are skewed to the downside.

On the other hand, the two major economies of Germany and France have also fallen into political difficulties. In December, the German parliament held a special session to vote on a motion of confidence in Chancellor Scholz, who failed to gain the support of more than half of the members, leading to a scheduled early election on February 23 of next year. In November, Scholz dismissed his finance minister Christian Lindner, stating that the pro-business FDP chairman rejected the proposal to suspend restrictions on new borrowing to help cover next year's budget shortfall, triggering this political crisis.

In France, the National Assembly passed a motion of no confidence against the government. According to the French Constitution, Prime Minister Michel Barnier submitted his resignation to the President on behalf of the government. This is the first time since 1962 that the French government has been overthrown by the Parliament. Previously, Barnier attempted to bypass the Parliament to force through a social security bill, which provoked strong backlash from both the far-right National Rally and the leftist party coalition. Both factions proposed a motion of no confidence against the government, which was voted on and passed on December 4, ultimately leading to the government's downfall.

Just days after French President Macron appointed the country's fourth prime minister in a year, the French central bank lowered its domestic growth forecast, citing that political turmoil has dampened confidence among households and businesses.

The sudden political turmoil combined with economic weakness has reignited discussions about the Euro falling to parity with the US dollar, complicating the European Central Bank's future monetary policy path.

Analysts have stated that considering Germany's economic weakness, France's political turmoil, and the potential trade impact of Trump's return to the White House, it is expected that the European Central Bank will continue to cut interest rates at every monetary policy meeting until mid-2025.

Bank of England

Compared to economies such as the USA and the EU, the Bank of England is reducing interest rates very slowly. The latest budget released and all the accompanying additional government spending are expected to stimulate economic growth in 2025. Meanwhile, inflation in the UK has risen again in recent months, with service industry inflation remaining high.

After lowering interest rates by 25 basis points in August this year, the Bank of England did not announce another rate cut until November, resulting in a cumulative reduction of only 50 basis points for the year.

The UK economy is also struggling, briefly falling into a technical recession at the end of 2023; however, GDP growth in the first and second quarters of this year has shown a robust recovery, allowing the Bank of England to focus on combating inflation in the first half of the year. On the other hand, the Labour Party's first budget after 14 years in power has reignited inflation concerns.

However, at the recent interest rate meeting, policymakers expressed greater disagreement on whether a rate cut is needed to address the economic slowdown.

In the December meeting, the Monetary Policy Committee (MPC) passed the interest rate resolution with a vote of 6 to 3, whereas the market originally expected only one member to support a 25 basis point rate cut. This indicates that an increasing number of central bank officials are favoring an immediate cut despite ongoing evidence of persistent inflation.

The latest data also shows that the UK economic recovery has stalled again. In the three months ending in September, UK GDP remained unchanged, lower than the previously forecasted growth of 0.1%. The economic growth for the second quarter has also been revised down to 0.4%.

Matthew Ryan, Ebury's Head of Market Strategy, indicated that officials at the Bank of England seem to be "more divided than ever" regarding the future path of interest rates. Doves are focused on the fragile UK economy, while hawks favor a gradual approach to rate cuts due to the recent rise in inflation.

Bank of Japan

The Bank of Japan officially ended the era of negative interest rates in March this year, and after raising rates by 15 basis points in July, it remained unchanged in September, October, and December.

To escape years of deflation, the Bank of Japan maintained an ultra-loose policy until March, but this led to a continuous depreciation of the yen.

The continued depreciation of the yen further exacerbated the risks of imported inflation. As the only central bank in the G10 that was in an interest rate hiking cycle, the Bank of Japan raised rates again in July, but this unexpectedly triggered turmoil in the financial markets. The rate hike by the Bank of Japan and the appreciation of the yen led to signs of a reversal in arbitrage trading, resulting in a "Black Monday" for global stock markets in early August.

At that time, the turmoil in financial and capital markets forced Bank of Japan officials to revise their hawkish stance. Although the Japanese stock market has recouped all the losses from "Black Monday," each move by the Bank of Japan still weighs heavily on global investors.

Before the recent December interest rate meeting, the market was increasingly confused about when the Bank of Japan would raise interest rates due to comments from officials and media reports.

Keiko Onogi, a senior Japanese government bond strategist at Daiwa Securities, said, 'I don't know what the Bank of Japan wants to do - after July, I had hoped that the bank would improve its communication with the market, but not much has changed. At the beginning of his tenure, Bank of Japan Governor Kazuo Ueda was praised for his clear and orderly communication style, which was seen as a significant difference from his predecessor, Haruhiko Kuroda, who often shocked global markets with unexpected decisions.'

However, in light of the current inflation level, yen, and economic situation, the Bank of Japan is indeed in a dilemma. Additionally, domestic political issues in Japan and uncertainties in overseas economics and policies are also affecting the central bank's monetary policy.

The Bank of Japan sent cautious signals in the December meeting, with Kazuo Ueda stating that the decision to keep interest rates unchanged was primarily based on an assessment of wage trends, uncertainty in the overseas economy, and the policies of the next U.S. government.

Regarding Japan's future economic and inflation outlook, the central bank's statements are similar to previous ones and do not offer much excitement. The Bank of Japan stated that the economy is recovering moderately but still has some weaknesses; the uncertainty regarding Japan's economic and price outlook remains quite high. During the second half of the three-year forecast period, ending in fiscal year 2026, the inflation level may align with the Bank of Japan's price target.

Other central banks

In most developed countries, the Reserve Bank of Australia also maintains a hawkish stance, insisting on no interest rate cuts throughout the year. However, recently, the Reserve Bank of Australia's attitude towards inflation has softened, noting an unexpected slowdown in economic growth due to reduced household spending caused by high-interest rates, despite the recent tax cuts. Currently, the market believes that the possibility of the first rate cut in February next year exceeds 50%.

In stark contrast, the Swiss National Bank unexpectedly cut interest rates in March this year, becoming the first G10 country to lower rates since the COVID-19 pandemic. The Swiss National Bank has been at the forefront of monetary easing this year, reducing rates to 0.5% amid a continued decline in inflation, the lowest level since November 2022.

Beyond the major central banks, officials in Sweden, Pakistan, Chile, the Philippines, Mexico, and Colombia have all lowered rates this year. Morocco has reduced borrowing costs to encourage large-scale investments, including preparations for co-hosting the FIFA World Cup in 2030.

Russia, on the other hand, chose to 'violently' raise interest rates this year to combat high inflation and the continuing depreciation of the ruble, but surprisingly kept the rate at 21% during its last meeting this year, which caught most analysts off guard as they had expected the central bank to raise rates to combat persistent inflation.

In total, global central banks raised rates 30 times and lowered them 193 times in 2024.

Outlook for 2025: Trump 2.0 is coming, an unavoidable political topic.

As major central banks around the world begin their rate-cutting cycles one by one, loosening policies will undoubtedly continue to be the main theme in 2025. However, aside from inflation and economic issues, geopolitical factors, especially the potential policies of the incoming U.S. President Trump, have become an unavoidable topic for major central banks when formulating monetary policy.

Trump has threatened to implement radical tariff plans upon taking office, and economists generally believe this could lead to a resurgence of global inflation.

This cautious sentiment was fully reflected in the policies at the December meeting. In the Federal Reserve's interest rate decision, one official opposed cutting rates. Additionally, the Federal Reserve raised inflation expectations and hinted at smaller rate cuts next year; the Bank of England had three votes in support of lowering borrowing costs; in Japan, one official proposed a rate hike, citing increasing risks of rising prices, but was voted down by others who preferred to wait for more information regarding wages and Trump's policies.

In Europe, despite the possibility that the Russia-Ukraine conflict may end soon, the region could still face retaliation from Russia in the future. Some officials are concerned that direct military conflict may occur sooner or later, and worry that if the USA under Trump weakens NATO’s internal security guarantees, Europe will face risks.

Although global central banks insist on the independence of monetary policy decisions, the strong dollar amid high interest rates and inflationary pressures from potential tariffs imposed by Trump could pose more uncertainties for the prospect of looser global policies.

Federal Reserve: Trump Returns

Before the December meeting began, the market widely anticipated that the Federal Reserve would adopt a "hawkish" approach to interest rate cuts, expecting the policy easing in 2025 to be about half of the 100 basis points predicted by policymakers three months ago. However, based on the latest hawkish stance of the officials, the current market pricing expects the Federal Reserve to cut rates only once in 2025.

The prospect of changing market expectations highlights some challenges Trump may face in fulfilling key campaign promises. The Federal Reserve's tightening of policy may keep important consumer rates like mortgage rates high, while inflation slowing less than expected may undermine the Federal Reserve's commitment to reducing prices.

Powell revealed in a press conference following the December meeting that some FOMC members have begun to conduct preliminary assessments of the potential impacts of Trump's policies, trying to determine what effects Trump's proposed tariffs, tax cuts, and immigration restrictions may have on policy.

Some individuals indeed took very preliminary steps and began to incorporate highly conditional estimates of the economic impacts of policies into their forecasts during this meeting, Powell said when discussing expectations for economic growth and inflation in 2025.

Powell has repeatedly urged caution regarding further interest rate cuts.

Fitch expects that the increase in tariffs will have a negative impact on multiple countries, including the USA, Canada, Mexico, South Korea, and Germany, with global effects likely to become more pronounced by 2026.

Fitch stated: "Tariffs will raise inflation in the USA, and inflation has proven to be quite stubborn. The crackdown on immigration may reduce the growth of labor supply, thereby exacerbating inflation, and we have revised up our inflation expectations for the USA. Nevertheless, we still expect the Federal Reserve to gradually reduce interest rates to neutral levels next year, with a forecast of a 125 basis point cut by the end of 2025. However, we no longer expect the Federal Reserve to cut rates further in 2026."

While some market participants doubt whether this concern is exaggerated, especially in comparison to the minimal impact the Trump 1.0 tariffs had on inflation in 2018, the fact is that price expectations were well anchored at that time.

Research from the Oxford Economics Institute shows that caution should be taken with such comparisons. Products affected by tariffs have indeed shown significantly higher inflation:

Ultimately, the decision of the Federal Reserve on monetary policy still revolves around its dual mandate of maximizing employment and price stability. According to the latest non-farm employment data for November, new jobs rebounded significantly more than the market expected, with the unemployment rate rising as anticipated to 4.2%; the inflation measure favored by the Federal Reserve—the US November PCE price index—unexpectedly cooled, although it still remains above the Federal Reserve's 2% inflation target, it significantly indicates that it is getting closer to the target.

Powell clearly stated that the basic outlook is for the economy to continue performing well, with sustained growth and low unemployment, and officials expect inflation to gradually decline. Once inflation shows more progress, interest rates will decline again, with the "extent and timing of further adjustments to the target range" depending on the "upcoming data, changing outlooks, and risk balances."

The latest dot plot indicates that the Federal Reserve expects to cut rates twice in 2025, each by 25 basis points, compared to September's expectation of four rate cuts, each by 25 basis points; the Federal Reserve expects to cut rates twice in 2026, each by 25 basis points, consistent with the September expectation.

The Federal Reserve's inflation forecast for the first year of Trump's new government has jumped from the previous 2.1% to the current 2.5%. It is expected that inflation will only return to the target level of 2% by 2027, which means that the pace of rate cuts will slow down, and the terminal rate will be slightly higher at 3.1%, to be reached in 2027, compared to September's expected terminal rate of 2.9%. The long-term federal funds rate expectation has risen to 3.0%.

Blackrock Investment Institute Director Jean Boivin pointed out that the Federal Reserve dampened market hopes for significant rate cuts in 2025.

He added that considering the potential inflation resurgence risks from trade tariffs and the pressures on the labor market caused by slowed immigration, expecting only two more rate cuts in 2025 now seems reasonable.

Morgan Stanley's U.S. economist Michael T Gapen and his team released a latest report stating that the Federal Reserve's current hawkish outlook aligns closely with their predictions—Trump's trade and immigration policies may keep inflation resilient and delay further rate cuts by the Federal Reserve.

Morgan Stanley added that the prospects of Federal Reserve rate cuts depend on the future implementation progress of Trump's restrictive policies; however, the impact of these policies on economic activity may lag. Therefore, although the Federal Reserve is currently hawkish, it may later turn dovish. Similar to 2018, when the Federal Reserve had predicted further rate hikes but ultimately chose to cut rates when economic activity slowed.

Goldman Sachs believes that in the long run, the negative impact of Trump's policies on economic growth may outweigh the short-term shock to inflation, prompting the Federal Reserve to cut rates to support the labor market.

As for the Federal Reserve's path for rate cuts, Goldman Sachs expects only two 25 basis point cuts in 2025, but will continue to cut rates until they reach 2.6% by the end of 2026.

Andrew Hollenhorst, Chief U.S. Economist at Citigroup, believes that once signs of weakness appear in the labor market, the Federal Reserve's hawkish policy stance may not last long and will instead shift to a dovish position.

The bank pointed out: "In the coming months, continued weakness in the labor market may become more pronounced, leading to a faster pace of interest rate cuts than the market expects. We anticipate that Powell and the committee will significantly shift to a dovish stance in the coming months."

European Central Bank: Internal and External Challenges.

In December, the European Central Bank announced its fourth interest rate cut of the year and downgraded inflation expectations for this year and next year. The ECB remains dovish and is expected to cut rates further next year. Currently, the money market has fully priced in a cut of at least 100 basis points by the ECB by 2025, reaching the lowest level since January 2023.

Although ECB President Christine Lagarde was vague about further rate cuts, she specifically emphasized the risks of downside to economic growth, including the potential for tightening trade relations between Europe and the USA under Trump's leadership.

Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, stated that Powell's remarks could have a "relatively mild but not negligible" impact on the ECB, adding that the ECB is more likely to be influenced by Trump's policies.

"The economic outlook for the USA and the Eurozone is completely different for next year," Ryan pointed out, noting that the Eurozone's economic growth remains weak and susceptible to severe trade policies.

Due to the negative impact of escalating trade tensions on the economy, major banks like Bank of America and Goldman Sachs believe that the European Central Bank may further significantly cut interest rates.

Bank of America economist Ruben Segura Cayuela believes that the European Central Bank's shift from a hawkish to a dovish stance is a signal that further significant interest rate cuts may occur.

He stated, "We expect the European Central Bank to cut rates to 1.5% consecutively before September next year," and added that this forecast is based on the assumption of deteriorating data and escalating global trade tensions.

"Given the re-emergence of uncertainty regarding trade policies and the impact of tariffs, the risk of a faster rate cut cycle is significant."

Goldman Sachs economist Sven Jari Stehn also emphasized the possibility of accelerating rate cuts based on the economic outlook.

"Given our forecast of a slowdown in economic growth and a gradual decline in core inflation to 2%, we expect a 25 basis point cut in January next year, with a potential 50 basis point cut in March."

Goldman Sachs expects that by mid-2025, consecutive rate cuts will bring deposit rates down to 1.75%, but Stehn noted that if conditions worsen, cuts may happen "more quickly and more significantly."

Bill Diviney, head of macro research at ING, predicts that trade tariffs could lead to an anti-inflation shock in the Eurozone, further pulling inflation below the European Central Bank's target of 2%.

"We expect the European Central Bank to cut rates by 25 basis points at each of its meetings next year, except for a pause in April. Ultimately, we will see the ECB's deposit rate fall all the way down to 1%."

In addition, there are concerning issues within the Eurozone, particularly the fiscal problems faced by Germany and France, which have both recently experienced government collapses. Whether monetary and fiscal policies can coordinate has become another major issue.

Lagarde reinforced the approach of balancing both sides, stating that monetary policy decisions remain flexible and will not follow a predetermined path.

She emphasized that the significant economic challenges faced in the region cannot be addressed solely by monetary policy, noting that the ECB 'cannot be a万能工具 for the European economy.'

Ed Yardeni, president of Yardeni Research and a veteran Wall Street Analyst, also agrees with this view, calling for decisive action from the EU on governance and economic growth reforms.

However, some analysts hold a different view regarding the ECB's dovish stance. They point out that a key factor for the market's divergence is Lagarde's comments on the so-called 'neutral interest rate,' noting that policymakers did not discuss this issue.

The market is betting that the ECB's key interest rate will drop to around 1.75% by the end of 2025, which falls within the lower end of the ECB's estimated rate of 1.75%-2.5% mentioned by Lagarde on Thursday.

Moreover, Arne Petimezas, head of research at the Dutch brokerage AFS Group, mentioned that Lagarde's comments about inflation in the services sector remaining high also made her sound quite hawkish.

Ryan from Ebury stated that if the US Dollar continues to strengthen, reaching parity with the Euro, the European Central Bank may also slow down its easing pace. "The biggest impact of Trump 2.0 will be a slowdown in economic growth," he added.

But overall, the policy direction is clear. In the monetary policy statement from December, the European Central Bank clearly abandoned its commitment to maintain sufficiently restrictive rates "for as long as necessary," indicating a significant shift toward a more accommodative stance.

Lagarde also explicitly stated this. In a recent speech, she said, "After a long period of restrictive policy, we have gained more confidence that the economy will return to the (2%) target in a timely manner."

"Lagarde has been very dovish," said Piet Christiansen, chief analyst at Danske Bank. He noted that Lagarde's comments on inflation risks are currently two-sided, with weakening labor demand and downside risks to economic growth.

Bank of England: Hawk-Dove Battle

The level of disagreement at the Bank of England's final rate meeting this year surprised the market, suggesting that the central bank is wavering on its future policy path.

So far this year, the Bank of England has maintained a slow pace of rate cuts, and at the December meeting, the monetary policy committee members who supported keeping rates unchanged emphasized the uncertainty of the outlook. Governor Bailey stated that the Bank of England needs to stick to its current "gradual approach" to rate cuts.

The Bank of England stated: "Overall inflation is expected to continue to rise slightly in the near term." Official data showed that in November, consumer price inflation in the UK rose to 2.6%, slightly higher than that of other G7 countries, and also slightly above the Bank of England's forecast from last month.

At the same time, the central bank lowered its growth forecast for the last quarter of 2024 from the previous 0.3% to zero.

Despite this, the Bank of England believes that Chancellor Rachel Reeves' budget on October 30 will have a net positive impact on economic growth in the short term.

However, members of the monetary policy committee pointed out that it is still "particularly uncertain" whether the cost of the employment tax hike will be passed on to consumers through rising prices, or lead to unemployment and a slowdown in wage growth.

In addition, the Bank of England added that any changes in US trade policy under the incoming president Trump are also difficult to predict for the UK.

Bailey noted: "With increasing economic uncertainty, we cannot commit to when or how much we will reduce interest rates next year."

As a result, there are views suggesting that the Bank of England's rate cuts next year will still be slow, with the MMF currently expecting a reduction of about 50 basis points.

KPMG's UK chief economist Yael Selfin stated: "The monetary policy committee's ability to relax interest rates next year will be constrained by the challenging inflation backdrop."

She added: "This will put the Bank of England in a unique position relative to other central banks in Europe, especially the European Central Bank. In Europe, the weakening economic growth outlook increases the urgency for interest rate cuts."

Lindsay James, an investment strategist at Quilter Investors, stated that the Fed's hawkish comments are likely to have little impact on the Bank of England, noting that the market has hardly repriced after the meeting.

However, she pointed out that a stronger dollar could put pressure on the British Pound, raising inflation on imported goods and ultimately slowing the pace of interest rate cuts.

"Both the British Pound and the Euro against the dollar may weaken further, leading to increased import inflation, particularly fuel inflation, with smaller impacts from food inflation. This limits the scope for interest rate cuts."

However, economist expectations are more optimistic, forecasting that the Bank of England will cut interest rates four times next year due to the weakness of the UK economy. The country's economy experienced contractions in September and October, marking the first consecutive decline since the COVID-19 pandemic, and third-quarter economic growth also stagnated, mainly due to the new government announcing a 25 billion British Pound ($31 billion) tax increase on corporate employers.

Sanjay Raja, Chief UK Economist at Deutsche Bank, stated that he expects the Bank of England to cut rates by 25 basis points in February next year, and then cut rates by 75 basis points in the second half of the year.

Bank of Japan: A unique case after all.

The Bank of Japan kept its benchmark interest rate unchanged at 0.25% during the December rate meeting, choosing to take time to assess the impact of financial and Forex markets on Japanese economic activity and prices.

Currently, the problem facing the Bank of Japan is whether to wait for the results of the spring wage negotiations before deciding whether to raise interest rates, or to raise rates early to prevent further depreciation of the yen.

Bank of Japan Governor Kazuo Ueda stated, "There is uncertainty regarding the policies of the incoming US administration, so we need to examine their impacts more carefully." He also pointed out that Trump's trade and fiscal policies will have a significant impact on the global economy and financial markets.

Forex strategists and Japanese companies are concerned about the potential negative impact of Trump's policies on Japan.

A survey conducted among Japanese companies indicates that nearly three-quarters of businesses expect Trump to have a negative impact on their operating environment.

Forex strategists point out that if the Bank of Japan maintains interest rates until March next year or later, a dangerous situation of further depreciation of the yen will arise. Some strategists indicate that widening interest rate differentials may bring yen carry trades back, and the nightmare of 'Black Monday' may reoccur.

Shigeto Nagai, the Japan economist at Oxford Economics, stated that the Federal Reserve's cautious stance on interest rate cuts in 2025 will increase the risk of further strengthening of the dollar.

He stated, "If the financial markets gain a clearer understanding of Trump's policies and the dollar strengthens further, the weakness of the yen may once again become a major driving force behind the Bank of Japan's interest rate decisions in 2025."

The depreciation of the yen will continue to pose a risk for the Bank of Japan in 2025, as it will squeeze real incomes and hinder wage-driven inflation dynamics.

In addition to the threat posed by the US dollar, the policies of the Bank of Japan are also affected by domestic political turmoil.

The unexpected election of Shishiba Nobutake, who supports the normalization of the Bank of Japan's policies, boosted the performance of the yen, but in October, Shishiba decided to hold early elections, resulting in his party losing the majority. The leader of the opposition Democratic Party for the People has consistently opposed interest rate hikes by the central bank, stating that policymakers must consider whether real wages turn positive when formulating fiscal and monetary policies.

In fact, the strong results of the spring wage negotiations this March are a prerequisite for the Bank of Japan to end negative interest rates. Therefore, the wage trend will also be key in determining whether to raise interest rates, which in turn will decide if inflation is sustainable.

In Japan, the labor negotiations that begin every spring have become an important variable for observing the trends of the Japanese economy, serving as a 'barometer' for wage increases throughout the year.

Ueda Kazuhiro stated that monetary policy depends on the economy and inflation. If the economic outlook is realized, interest rates will be raised. He noted that recent economic data roughly corresponds with expectations and that the timing of adjustments will be decided after examining the data, with attention needed on the momentum of the spring wage negotiations.

As of the December 2nd survey of winter bonuses for 2024, Japanese companies are increasing bonuses to employees, boosted by the continuing recovery in the manufacturing sector, including Semiconductors. Specific data shows that the average bonus per person (weighted average) has reached about 0.9368 million yen, an increase of 3.49% year-on-year, marking a historic high for two consecutive years.

Currently, the amount of winter bonuses issued by Japanese companies has increased for four consecutive years, reaching the highest level since surveys began in 1975. This year's increase is 1.08 percentage points higher than last winter. Among 497 companies surveyed, 217 (about 43.66%) will determine the amount of winter bonuses during next year's spring labor negotiations.

However, whether small and medium-sized enterprises, which account for 'half of the economy' in Japan, can keep pace with the wage increases of large companies is an uncertain factor for next year's spring wage negotiations.

Although large companies have signaled their readiness to continue raising salaries to attract talent, uncertainty remains about whether small businesses can follow suit, as many small enterprises lack the global presence and competitive advantages enjoyed by their larger rivals.

According to estimates from a corporate survey released by Japan's Ministry of Finance last week for the period from July to September, small and medium-sized enterprises have allocated about 70% of their profits to wage costs, significantly higher than the roughly 40% seen in large companies.

A recent survey showed that while 68% of small and medium-sized enterprises raised wages this year, most did so out of necessity—such as retaining workers—rather than reflecting an increase in revenue.

A survey by the Japan Chamber of Commerce and Industry (JCCI) also indicated that many small and medium-sized enterprises find it more challenging to pass on labor costs compared to rising raw material and energy costs.

Moody's analyst Stefan Angrick stated that although the Bank of Japan did not take action earlier, it seems determined to tighten policy further. The latest economic data leaves the Bank of Japan with limited options: the strength of the Japanese economy is not sufficient for a significant interest rate hike, but the current situation may lead to further depreciation of the yen and an increase in inflation.

Moody's forecasts that the Bank of Japan will have two more interest rate hikes in 2025. If wages and economic growth exceed expectations, the yen weakens again or overseas central banks hike rates, the Bank of Japan may intensify its tightening measures.

Editor/ping