Global rate outlook: Interest-rate movements diverge around the world
Global interest rates have become unsynchronized after moving in lockstep during the Covid pandemic, when virtually all central banks lowered rates to fight economic weakness.
Now the economic picture varies across the globe, and as a result so does central-bank interest-rate policy. That dynamic will likely continue as major economies head in different directions.
In the US, economic resilience and stubborn inflation have sent bond yields higher over the past five months. The economy grew an annualized 2.3% in the fourth quarter, and the Atlanta Federal Reserve’s forecast model projects 2.9% for this quarter. Meanwhile, consumer prices soared 0.5% in January, the biggest gain since August 2023.
Interest-rate futures traders have now pared expectations to just one rate reduction by the Fed this year. The central bank cut rates three times last year. That means bond yields could stay steady or move higher in coming months.
European Central Bank is easing
Elsewhere, the European Central Bank remains in easing mode, thanks to weak economic growth. Last year, the eurozone economy expanded only 0.7%. And analysts surveyed by Bloomberg don’t see much improvement this year – 1%. European economies suffer from heavy regulation and weak exports.
Eurozone inflation has risen over the past five months, totaling 2.5% year-on-year in January. But the ECB still lowered rates last month for the fifth time since June, and money markets recently pointed to three to four more rate cuts this year.
The central bank outlook in Asia
In China, the central bank decreased rates last year and is likely to do so again this year amid economic weakness. China’s economic growth hit the government’s goal of 5% last year, but analysts say the government vastly overstates its numbers. The economy suffers from the bursting of a huge real estate bubble and sluggish consumer spending.
The People’s Bank of China left interest rates unchanged in December. But experts think reductions will come soon, as central bank officials have pledged to do so.
In Japan, the central bank raised its key interest rate in January to the highest level since 2008. It was the third hike in less than a year.
Rising inflation prompted the Bank of Japan to act. BOJ officials lifted their 2025 inflation estimate to 2.4% from 1.9% previously. Inflation totaled 3% in 2024. The yen’s slide has pushed prices higher by making imports more expensive in yen terms. And BOJ Gov. Kazuo Ueda said the central bank will raise rates further if its inflation outlook is realized.
An outbreak of tariff hikes could upset this global picture, boosting inflation pretty much everywhere. And higher inflation generally means higher interest rates. But for now there’s no uniform view for global rates.
