Central bank scanner: Fed rejoins rate cutting cycle

European Central Bank (ECB):

• Recent Action (September 11): No change to the policy rate. Policymakers noted that the balance of risks was even between the labor market and inflation. The ECB did not discuss the possibility of bond market intervention despite rising rates across the bloc and French political turmoil.
• Upcoming (October 30): No further rate cuts are forecast. The is likely the end of the cutting cycle barring unexpected changes to trade and inflation.

Federal Reserve (Fed):

• Recent Action (September 17): The Fed cut 25 basis points in an 11-1 vote. This was a “risk management cut” as the downside risks to the labor market worsened more than upside risks to inflation. The Fed released its forecasts and trajectory or rate cuts through 2028. There was a slim consensus for two additional cuts, although a significant minority -7 of 19 – expect no additional cuts this year. The lone dissent was Stephan Miran, who was sworn in to replace the vacancy by Governor Adriana Krugler.
• Upcoming (October 29): The Fed is forecast to cut twice more by year-end, although the second cut is not a slam dunk. Leadership changes in the Fed next year lead us to expect more aggressive rate cuts in 2026, which ups the risk of a more pernicious bout of inflation.

Bank of Canada (BOC):

• Recent Action (September 17): The BOC cut 25 basis points. The labor market weakened with the unemployment rate reaching 7.1%, the highest since August 2021. Resilient retail sales and consumer confidence provided a buffer for no rate cut even as the recovering economy faces tariffs.
• Upcoming (October 29): One more rate cut is possible this year, but it is not a sure thing. This cut may be possible if 1) economic growth remains subdued, 2) inflation softens and 3) trade-related price pressures are “contained.”

Central Bank of Brazil:

• Recent Action (September 17): No change to the policy rate. Growth has been soft, but the labor market strong—sending conflicting signals. Fiscal stimulus has kept consumer spending resilient, despite restrictive monetary policy.
• Upcoming (November 5): The CBB is forecast to cut rates in late-2025 or early-2026 from the current elevated level of 15%. The central bank does not want to relive its last episode with cutting rates too early and contributing to a resurgence of inflation.

Bank of Japan (BOJ):

• Recent Action (September 18): No change to the policy rate. A new government, a trade deal with the US and subsequent effects of tariffs on corporate profits and therefore wage increases (and ensuing inflation) make for a tricky puzzle for policymakers.
• Upcoming (October 30): The next hike in rates is forecast in early 2026. Skyrocketing bond yields, exacerbated by fiscal dominance, keep the BOJ on hold in the back half of 2025.

Reserve Bank of India (RBI):

• Recent Action (August 5): No change to the policy rate in a unanimous decision. Softer inflation reversed course in August, though it remains below the RBI’s target.
• Upcoming (September 30): The RBI is forecast to cut rates at least once more to buffer the effects of US tariffs. If a deal is reached to reduce US tariffs on Indian imports, then the likelihood of further cuts decreases.

Bank of England (BOE):

• Recent Action (September 18): No change to the policy rate in a 7-2 vote. The dissents favored a 25-basis point cut. The Monetary Policy Committee (MPC) voted to reduce gilt holding by 70 billion pounds over the next 12 months.
• Upcoming (November 6):  A 25 basis point cut is expected. The MPC is committed to making “data-driven” decisions, with special attention paid to the path of inflation.

Bank of Mexico (Banxico):

• Recent Action (August 7): Banxico cut 25 basis points in a 4-1 vote. Growth bettered expectations in the second quarter, proving some breathing room.
• Upcoming (September 25): A 25 basis point cut is expected despite inflation ticking higher in August. Slowing growth is the impetus for cutting in the face of price pressures.

Reserve Bank of Australia (RBA):

• Recent Action (August 11): The RBA cut 25 basis points. Inflation neared the midpoint of the RBA’s inflation target, while the unemployment rate rose. Policymakers are “cautions about the outlook.”
• Upcoming (September 29): The RBA is forecast to cut 25 basis points in 2025 and another 25 basis points in 2026. Trade tensions are expected to dampen consumer and business activity, while inflation continues to cool. That provides room for further RBA rate cuts.

People’s Bank of China (PBOC):

• Recent Action (September 21): No change to the policy rate. Since post-pandemic inflation has not been an issue for China; the PBOC has been cutting rates to stimulate soft domestic demand.
• Upcoming (October 20): The PBOC is expected to cut rates later this year, though gradually. Amid trade policy changes, the economy has held up better than anticipated due to fiscal measures. Policymakers posited that additional monetary easing may worsen overcapacity issues via cheap credit.

The Fed’s “risk management cut” is likely the start of many cuts to come. Even the two governors who dissented last meeting fell in line for one cut in September, indicating gradualism still rules on the path to lower rates. That will help the central bank catch up with many of its peers, as most banks are deep in cutting cycles.

Fiscal dominance, that is the overpowering influence of fiscal policy on monetary policy, is gaining traction. Rising government bond yields, especially on the long end, must be considered by central banks at the risk of straining government finances or worse, harming the credit worthiness of a country.