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- Major changes from central banks have shown divergence in policy, shaping expectations of future moves.
- Markets reacted to fresh labor and inflation data from the US that continue to shape Fed expectations for 2026 policy moves.
As the week wraps up, major central banks such as the Bank of Japan (BOJ), the European Central Bank (ECB) and the Bank of England (BOE) have made new changesto their monetary policy and economic forecasts, shaping future expectations for interest rates.
Meanwhile, fresh inflation and labor market data from the US showed more easing, supporting expectations for another Federal Reserve rate cut.
Bank of Japan Rate Hike and Policy Normalization
The Bank of Japan raised interest rates to 0.75% this week, reaching a 30-year high and causing a rise in government bond yields. According to the BOJ, economic activity will continue to be supported by favorable financial conditions, while real interest rates are predicted to stay negative. Japan began its path to normalization last year after ending its negative interest rate policy. ⁽¹⁾
Inflation is still holding above the BOJ’s 2% target, with CPI reaching 2.9% YoY in November, while wages have declined for 10 consecutive months. ⁽²⁾
European Central Bank Rates on Hold as Outlook Turns More Optimistic
The European Central Bank increased growth and inflation projections while maintaining interest rates at 2.15%. With the help of exports and domestic spending, the eurozone’s recent growth exceeded forecasts.
Inflation kept near the ECB’s 2% target, driven mainly by services prices and is expected to remain near that level. The improved outlook has eased expectations of further rate cuts, where interest rates were brought down from 4% to 2% by last June.
ECB officials expect interest rates to remain unchanged next year, but refused to rule out any moves of either a hike or a cut due to global uncertainty. ECB President Christine Lagarde reiterated that policy decisions will remain data-dependent and meeting-by-meeting. ⁽³⁾
The ECB stated that global uncertainty will continue to impact growth. Inflation forecasts are expected to show declines below 2% in 2026 and 2027 before returning back to the target in 2028. Growth is forecasted at 1.4% for 2025, 1.2% for 2026 and 1.4% for 2027 and 2028. ⁽⁴⁾
Bank of England’s Narrow Rate Cut Signals Cautious Easing Path
The Bank of England cut interest rates by 25 basis points to 3.75%, marking its fourth cut this year, and was widely expected by markets. The decision came followingweak economic data, such as a soft labor market, slow growth and easing inflation.
The vote was split 5-4, with Governor Andrew Bailey siding with dovish members against policymakers concerned that inflation, at 3.2% in November, remains well above the 2% target. The MPC said inflation is expected to fall back toward the central bank’s target more quickly in the near term but warned that further easing will depend on how inflation evolves. ⁽⁵⁾
The MPC stated that interest rates are likely to gradually continue downwards. ⁽⁶⁾
Chancellor Rachel Reeves cheered for the BOE’s cut, calling it the sixth since the July 2024 election and the fastest pace of easing in 17 years. Economists expect the next possible cut in early 2026, as the BOE forecasts zero growth in the fourth quarter of 2025. ⁽⁷⁾
US Labor Market Cools as Inflation Softens
US labor market data displayed a mixed picture. Nonfarm payrolls showed an increase of 64,000, higher than its forecasts, while the unemployment rate rose to 4.6%, reaching its highest level in four years. ⁽⁸⁾
October marked the third negative payroll reading in six months, while revisions to August and September weakened the recent trend even further, reinforcing signs of slowing momentum in the US labor market.
US CPI came in less than expected in November, supporting the narrative that inflationary pressures are easing. Headline CPI came in at 2.7% YoY, while core inflation came in at 2.6%, both below their estimates. ⁽⁹⁾
Monthly inflation data for both headline and core CPI came in at 0.2%, weaker than estimates. Shelter inflation slowed further, supporting progress toward the Fed’s 2% target, while food and energy prices rose 2.6% and 4.2%, respectively.
The report was affected by data disruptions from the government shutdown and the cancelled October CPI release, limiting comparisons. Still, investors viewed the softer inflation data as supportive of further Federal Reserve easing after its third consecutive rate cut earlier this month.
