Global Navigator from KPMG Economics

• Most major central banks are cutting rates. In September, the Federal Reserve (Fed) joined the club of major central banks, including the Bank of England, Bank of Canada, the European Central Bank (ECB), and many emerging market central banks in cutting interest rates. The Bank of Japan is the outlier as it is forecast to raise once more this year to counter inflation.
• Services inflation remains stubborn. An influx of tourists, the bargains created by a strong dollar and weaker currencies abroad and higher wages, have created a floor under service sector inflation abroad. That has slowed or even reversed the ambitions for rate cuts by some central banks, notably in emerging markets.
• Boost to growth in Brazil could be short-lived. Brazil’s central bank was among the first to hike rates, which cooled inflation and enabled it to cut ahead of its counterparts. That boosted growth and inflation, along with weakness in its currency. In response, Brazil has done an about-face and started to hike rates again. That could temper growth in 2025.  

Global growth is forecast to expand 3.1% in 2024, the same pace as 2023. In 2025, growth is expected to slow to 2.9% before accelerating to 3.3% in 2026. Inflation is forecast to continue to cool over the forecast horizon, although the downward glide is slower than the initial ramping up in prices.

South America’s forecast received the biggest boost, owing nearly all to a resurgence in growth in Brazil. The forecasts for Asia and Europe were upgraded, but not to the same extent. The outlook for North America, the Middle East and Africa deteriorated. Canada slowed faster than expected, which has left its central banking scrambling to stimulate; the drop in oil prices is a major factor.

Sticky services inflation remains a hang-up for many countries, driven primarily by wage gains. Some of the decline in headline prices can be attributed to softening energy prices, which are a product of weak global demand. The slowdown in China is a major hurdle in the demand side, while the US continues to turn out record oil production. The Organization of the Petroleum Exporting Countries (OPEC) was expected to reverse its production cuts to close out 2024 but cheating within OPEC is rampant. That leaves Saudi Arabia in the position of bearing the brunt of a cut in production, which looks less likely.

China continues to fight weak domestic demand resulting in disinflationary, bordering on deflationary, pressures. Sliding equity markets have driven investors into yuan-denominated debt, pushing down yields. The central bank is concerned that if banks pile into long-dated bonds and yields rise, these financial institutions could encounter a spike in unrealized losses. 

European Union (EU) growth is expected to weaken in 2025 due to weak credit growth and muted household consumption. EU inflation has been decelerating for almost two years and is forecast to reach the ECB’s 2% target in the second half of 2025. Services inflation has proven challenging; it now accounts for nearly three-quarters of inflation across the bloc. Inflation-adjusted wages recently rose at the fastest pace in the region’s 25-year history. Upcoming contract negotiations could cause wage gains to further increase. The ECB has treated the move up in wages as a catch-up to earlier inflation and not part of a larger inflationary spiral. Still, the ECB remains ambiguous about how much further and how rapidly it intends to cut rates compared to other central banks.

Brazilian output surprised to the upside in the second quarter. Wage gains, which rival Europe’s pay bumps, boosted consumer spending but at a price: higher inflation. Spending on utilities and construction, as well as broad services delivered the growth surprise. In August, headline inflation cooled for the first time in four months, but services inflation moved higher, repeating the global theme. 

While not exactly coordinated, most major central banks (excluding the Bank of Japan) have begun rate cutting cycles:

• Federal Reserve: The Federal Open Market Committee (FOMC) kicked off its interest rate cutting cycle with an outsized 50 basis point cut at its September meeting. Fears of further cooling in the labor market have prompted the Fed to pivot its focus from price stability to full employment. This is just the start of a recalibration cycle. We expect the Fed to cut by another half percent by year-end, with 25 basis points at both the November and December meetings. An additional 150 basis points is expected by mid-2026. We have left our estimate of the neutral or non-inflationary fed funds rate in the 2.75%-3% target range, although some within the Fed are now moving above that level. No one is expecting a return to the ultralow rates which defined much of the 2010s. The wild cards are trade and immigration policies, which simultaneously curb growth and boost inflation. Those policy shifts could force the Fed to make a U-turn and raise rates again.
• European Central Bank (ECB): The ECB voted to decrease its key, short-term rate by one-quarter point to 3.5% in a unanimous decision in September. That was the second rate cut of the cycle, following an initial cut in June. The ECB remains data dependent; it is looking for sustained progress on inflation, not just a good month driven by energy price declines (which is what happened most recently). With inflation cooling and growth set to rise in 2025 and 2026, the ECB is likely to hold rates flat at the October meeting and conduct another one-quarter point cut in December.
• Bank of England (BoE): At the September meeting, the BoE’s Monetary Policy Committee elected to hold rates unchanged at 5%. That followed its early August meeting where it opted for a “hawkish cut” in a five to four vote. An easing of wage growth paves the way for additional cooling in services sector inflation and more rate cuts prior to year-end. Recent improvements in inflation provide a light at the end of the tunnel. There are more rate cuts ahead but judging from Governor Andrew Bailey’s caution around timing and magnitude, this will be a slow process. The market is pricing in one more rate cut by year-end.
• Bank of Canada (BoC): At three straight meetings in June, July and September the BoC has decreased its policy rate by 25 basis points. This places the BoC at the forefront of major central bank cuts. Weak economic growth prompted the BoC to dial back its restrictive stance. A rising unemployment rate, albeit due to increased labor supply, has led to fewer labor shortages and cooled wage growth. The BoC voiced concern that it will overshoot its inflation target, indicating the need for an economic boost. An outsized 50 basis point cut is on the table as weakening oil prices and curbs to immigration drag on Canadian economic output.
• Bank of Japan (BoJ): The BoJ has been the outlier among developed economies, as it actually hiked interest rates in July. The BoJ surprised markets by holding rates unchanged in September. The yen has reversed course and appreciated, as the yen carry trade unwound. Investors were borrowing at ultralow rates in Japan to fund higher yielding investments abroad, including risky emerging market assets. They then dumped those investments as rate hikes by Japan were realized. Increasing wage gains will likely contribute to added rate hikes by the BoJ, as productivity growth remains low. Following the yen carry trade unwind of early August that unnerved markets, the BoJ promised to remain on the sidelines if markets were volatile. This could temporarily impede future rate hikes.
• The People’s Bank of China (PBoC):  The PBoC previously cut rates to stimulate flagging domestic demand and ease deleveraging in the real estate sector. After surprising markets by not cutting rates during its monthly rate fixing earlier in September, the PBoC unveiled a suite of stimulus including cuts across its key policy rates and banking reserve requirements, as well as additional property support measures. Equity markets responded to the announcement rebounding after months of weakness. Tension continues between banks’ battles with shrinking margins and economic stagnation, as lower rates give financial institutions less room to maneuver.
• Emerging Markets (EM): Rate cuts by the Fed have opened the door to more rate cuts by emerging market central banks. The strength of the dollar and an accompanying depreciation in their own currencies was limiting improvements in inflation for many emerging market economies. The shift is now reversing and opening the door to rate cuts across most emerging markets, with a few notable exceptions. Latin American central banks, which led the way with rate cuts, have slowed their pace due to persistent inflation. The Banco Central do Brasil hiked rates 25 basis points to counter resurgent inflation, reversing previous cuts from earlier in the year in a unanimous decision. The central bank faces an independence crisis amid flak for rate hikes from the current administration, which could limit rate hikes and progress made on inflation. 

Central banks have, with a few exceptions, begun a global rate-cutting cycle. The Fed’s decision to cut more aggressively in September has opened the door to more substantial cuts. Lower rates will act as a tailwind for the global economy in the second half of 2025 and into 2026. Big ticket purchases by consumers and business investment are expected to benefit the most from the downward move in rates.