In December 2024, the world’s major central banks, the Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BoE), and the Bank of Japan (BoJ) held their policy meetings and responded to evolving economic, financial, and geopolitical conditions.
On December 12th, the ECB reduced its key interest rates by 25 basis points, bringing the deposit facility rate to 3.00%. This decision was influenced by an updated assessment indicating that the disinflation process is progressing well, with headline inflation projected to average 2.4% in 2024 and 2.1% in 2025. The ECB also noted that domestic inflation remains elevated, primarily as a result of delayed adjustments in wages and prices following previous inflation surges. With the Eurozone economy weakening, the ECB will likely cut rates further into 2025; a 50bps cut as early as January cannot be ruled out. We expect the ECB to at least take its deposit rate to the neutral level (2%) and most likely below it.
The Federal Reserve concluded its policy meeting on December 18, opting to lower its Federal funds rate by 25 basis points to a target range of 4.25% to 4.5%, marking the lowest level since February 2023. This move is the Fed’s third rate cut of the year, motivated by the weakening of inflationary pressures. Despite the reduction, the rate remains above pre-pandemic levels, with updated projections indicating it will stay steady in the coming months. The Fed’s updated SEP dots anticipate two additional cuts in 2025, down from the four that had been expected in September. Fed Chair Jerome Powell emphasized a cautious approach to balancing employment and inflation risks, the latter deriving from the fact that inflation remains sticky and more inflationary pressure may be due as a result of expected policies from the incoming second Trump administration.
On December 19, 2024, the Bank of England’s Monetary Policy Committee (MPC) voted to maintain the base interest rate at 4.75%. This decision reflects a cautious stance amid a sluggish UK economy and rising inflation, which reached 2.6% in November, above the Bank’s 2% target. The MPC was divided, with three MPC members (Swati Dhingra, Dave Ramsden and Alan Taylor) out of nine advocating for a 25-basis point cut to 4.5%, highlighting concerns over the balance between controlling inflation and supporting economic growth. The BoE acknowledged the challenges posed by rapid wage growth juxtaposed with economic contraction, as the UK economy shrank for two consecutive months and is expected to stagnate in the near term. The Bank reiterated its intention to maintain a “gradual approach” to future rate cuts, with investors anticipating two to three reductions in 2025.
Finally, also on December 19th, the Bank of Japan concluded its monetary policy meeting, deciding to keep its key interest rate unchanged at 0.25%. This decision aligns with the BoJ’s ongoing commitment to its still-loose monetary policy stance, aiming to achieve its 2% inflation target sustainably, in spite of its previous rate increases in 2024 and its meaningful reduction in asset purchases. The BoJ continues to monitor economic indicators closely, maintaining its accommodative policy to support economic activity, but is expected to increase its policy rates again in January, in conjunction with the release of its new economic outlook.
In summary, December 2024 saw an adjustment of the policy stances of the world’s major central banks, reflecting their individual economic landscapes and inflationary challenges. The ECB and Fed proceeded with rate cuts to reflect the meaningful fall in inflation that has occurred over the last few months. But while the ECB is likely to accelerate its easing cycle, the Fed will follow a more cautious approach, and will likely pause for a few months. The BoE reiterated its “gradual approach” to further cuts, amidst economic sluggishness and persistent inflation. The BoJ maintained its steady course, keeping rates unchanged in order to support economic recovery, while keeping the door open to further hikes starting from January.
