Central bank scanner: Fed risks its credibility

European Central Bank (ECB):

• Recent Action (October 30): No change in the policy rate. Better than expected GDP growth in the third quarter with annual inflation near the ECB’s target puts the central bank in a sweet spot.
• Upcoming (December 18): No change in the policy rate is expected. The ECB hinted it would upgrade its growth forecasts for a second consecutive quarter. Barring unexpected changes to trade and inflation, the rate-cutting cycle has likely concluded.

Federal Reserve (Fed):

• Recent Action (December 10): The Fed cut 25 basis points. Three voting members dissented: Stephen Miran, voted opting for a 50 basis point cut while Jeffrey Schmid and Austan Goolsbee voted for no cut. The opinions on the FOMC have become increasingly divided over the last three meetings. The Fed opted to start purchasing T-bills for reserve management purposes.
• Upcoming (January 28): No change in the policy rate is expected. The Fed risks its credibility fighting inflation as its focus has narrowed to the labor market. Fed Chairman Jay Powell emphasized during the press conference in December that if job creation figures for 2025 are revised downward, it could result in additional months of negative employment growth. The composition of the Federal Open Market Committee takes center stage in the latter half of 2026 as the Supreme Court case on executive branch powers over staffing could lead to new committee members more willing to cut rates. We expect a rate cut at the March meeting and then more rapid cuts once Chair Powell’s replacement is seated.

Bank of Canada (BOC):

• Recent Action (December 10): No change in the policy rate. The unemployment rate declined to 6.5% in November from a seven-year high of 7.1% in September. Consumption and business investment contracted in the third quarter.
• Upcoming (January 28): No change in the policy rate is expected. Strong labor market reports offset weak consumption growth. The outcome of the USMCA renegotiation in 2026 will have a large impact on the economic outlook. It is possible that bilateral agreements will replace the current multilateral pact. Policymakers noted that if the economy continues to evolve as expected, then there will be no reason for rate cuts.

Central Bank of Brazil:

• Recent Action (December 10): No change in the policy rate. The Selic sits at a restrictive 15%. Despite recent inflation cooling, expectations remain materially above the central bank’s liking.
• Upcoming (January 28): The CBB is forecast to cut rates within the next few months. A strong labor market provides buffer for the CBB to hold while inflationary pressure, though receding, remains. Policymakers emphasized patience saying rates could remain unchanged for a “very prolonged period.”

Bank of Japan (BOJ):

• Recent Action (October 29): No change in the policy rate, in a 7-2 vote. The two dissents were in favor of a 25 basis point hike. The new trade deal with the US pushed the bank’s GDP forecast higher, while the inflation outlook remained unchanged.
• Upcoming (December 19): The BOJ is forecast to hike 25 basis points. Inflation edged back up to 3% in October after spending two months below that level for the first time this year. The BOJ has consistently restated its commitment to raising the policy rate if inflation continues to follow the forecasted path. The 10-year government bond yield continues to climb—it is now nearly 90 basis points higher than at the start of the year. That could prove a large fiscal challenge down the road.

Reserve Bank of India (RBI):

• Recent Action (December 5): The RBI cut 25 basis points. Easing inflationary pressure, with headline inflation nearing 0%, and expectations for decelerating growth prompted the cut.
• Upcoming (February 6): The RBI is forecast to cut rates at least once more through the first half of 2026. Policymakers struck a dovish tone, especially considering ongoing trade tensions with the US that are expected to hinder growth next year.

Bank of England (BOE):

• Recent Action (November 6): No change in the policy rate, in a 5-4 vote. The four dissents favored a 25 basis point cut. The swing voter stated that he expects further easing but would like to see durable disinflation.
• Upcoming (December 18): The BOE is forecast to cut 25 basis points. The new budget should relieve some inflationary pressures, but growth remains below potential. The MPC stays committed to making “data-driven” decisions, with no set policy path; however, a couple of more cuts are likely.

Bank of Mexico (Banxico):

• Recent Action (November 6): Banxico cut 25 basis points. GDP contracted in the third quarter while the central bank increased its forecast of core inflation.
• Upcoming (December 18): Banxico is forecast to cut 25 basis points. Inflation topped expectations in November, but weak growth due to trade challenges will likely drive the cut. Policymakers’ forward guidance indicates a more cautious approach to future cuts.

Reserve Bank of Australia (RBA):

• Recent Action (December 9): No change in the policy rate. Inflation came in above expectations in October and appears to be more persistent than previously thought.
• Upcoming (February 3): The RBA is forecast to cut 25 basis points by the end of 2026. Inflation is expected to recede next year, providing room for easing. Without inflation cooling, policymakers indicated rate hikes would be on the table.

People’s Bank of China (PBOC):

• Recent Action (November 19): No change in the policy rate. Despite sluggish domestic demand, policymakers are concerned that rate cuts could lead to overcapacity as lending for capital projects increases.
• Upcoming (December 20): The PBOC is forecast to gradually cut rates by the end of 2026. Tensions with the US have improved, but weak loan growth and slowing government borrowing will likely prod policymakers to lower rates.

Central Bank of Turkey (CBRT):

• Recent Action (December 11): The CBRT cut 150 basis points to 38% from 39.5%. That is down from a peak of 50% at the end of 2024. Soft demand and surprisingly mild November inflation supported the decision.
• Upcoming (January 22): The CBRT is forecast to cut rates throughout 2026; the size of the cuts is in question. Inflation expectations point to disinflation. Policymakers see the current rate as restrictive and will maintain this stance until reaching the 5% inflation target; inflation is currently 31.1%.