Global monetary policy is entering a new phase as several major central banks signal an end to the long easing cycle that followed the pandemic-era inflation shock. Across Europe, Asia and the Pacific, policymakers are reassessing their stance as inflation proves sticky in certain sectors, growth stabilises and fiscal stimulus reshapes domestic outlooks. A growing number of institutions are now preparing markets for the possibility that their next significant adjustment may be upward, not downward. Against this backdrop, the U.S. Federal Reserve remains the outlier—still cutting rates, albeit cautiously, and signalling that its own easing cycle could soon conclude. This divergence reflects not only different economic conditions but also institutional priorities, political dynamics and the contrasting composition of national inflationary pressures.

A Global Reassessment as Inflation Plateaus and Fiscal Dynamics Shift

The return of tightening bias among major central banks is driven by a combination of factors: decelerating but persistent services inflation, rising commodity volatility, and a shift from emergency fiscal measures toward targeted national industrial policies. Several economies are emerging from long periods of monetary accommodation with stronger-than-expected consumption and labour market resilience, prompting policymakers to reconsider whether they have already provided too much stimulus.

The Swiss National Bank, which maintains the lowest policy rate among developed markets at 0%, embodies this shift. Though inflation has fallen to zero due in large part to a powerful franc reducing import prices, the SNB refrained from further loosening and offered a more optimistic assessment of Switzerland’s export outlook. The message from Zurich is clear: negative rates are unlikely to return, and the bar for fresh easing is extremely high. Even with modest inflation projected for next year, markets expect the central bank to remain steady well beyond 2026.

Similarly, the Bank of Canada’s decision to hold its key rate at 2.25% reflects cautious confidence in domestic resilience. Strong oil exports, steady labour markets and fiscal spending have helped offset external pressures from U.S. trade policy. With third-quarter growth running at 2.6%, policymakers see little justification for additional support. Analysts now expect the BOC to maintain its pause until 2027, aligning it more closely with the tightening narrative unfolding across other G10 economies.

In Sweden, the Riksbank is also leaning toward a lengthy hold. With inflation hovering just above its 2% target and previous easing expected to filter gradually into economic activity, policymakers are signalling that stability—not stimulus—will dominate their agenda well into next year. Analysts anticipate no rate change at the upcoming meeting, reinforcing expectations that Sweden’s easing cycle is effectively over.

Pacific Economies Navigate Divergent Domestic Challenges

The Pacific region adds a layer of complexity to the global narrative, with New Zealand and Australia responding to very different macroeconomic pressures. New Zealand faces a difficult balancing act: unemployment is at a nine-year high, yet inflation has crept back toward the upper end of the central bank’s target range. For newly appointed Reserve Bank Governor Anna Breman, these conflicting signals make a hawkish pivot politically and economically sensitive. However, financial markets are already pricing in gradual tightening, projecting the cash rate to approach 3% by late 2026.

Australia, meanwhile, has taken one of the clearest steps toward re-embracing hiking mode. The Reserve Bank of Australia held rates at 3.6% and warned that the next move could be upward if inflation proves stubborn. This positioning marks a stark reversal from last year’s easing bias and reflects mounting concern about supply-driven price pressures, a tight labour market and a property sector that remains structurally undersupplied. Markets now fully expect a rate hike by June 2026, with some forecasting an earlier move in May. The hawkish tone immediately lifted the Australian dollar and pushed government bond yields higher, showing how sensitive markets remain to even modest policy shifts.

Japan stands at the opposite end of the spectrum. Having exited negative rates earlier this year, the Bank of Japan is now the only major central bank actively tightening. Its expected move to raise the policy rate to 0.75% underscores a historic departure from decades of ultra-loose policy. A large fiscal stimulus package announced by Prime Minister Sanae Takaichi has added upward pressure on long-term bond yields, prompting global investors to closely monitor spillover effects. BOJ Governor Kazuo Ueda faces a delicate communications task as he attempts to normalise policy without destabilising either the yen or government bond markets, both of which remain hypersensitive to tightening signals.

The European Central Bank Shifts Tone as Inflation Becomes More Entrenched

Until recently, the European Central Bank was considered a potential candidate for further easing. However, firming inflation in services and stronger-than-expected wage growth have prompted a sharp shift in tone among policymakers. Since mid-year, the ECB has held rates steady at 2%, but traders have rapidly re-priced expectations in response to comments suggesting that the next move could be a hike. While not imminent, this pivot reflects broader European concerns: energy transition policies, geopolitical tensions and fiscal expansion in several member states are contributing to more durable inflationary forces.

For markets, the ECB’s messaging is significant not because a rate hike is certain but because the institution is signalling willingness to act pre-emptively. This represents a clear departure from earlier months when policymakers were more focused on supporting fragile growth. With Germany facing stagnation and southern European economies showing uneven momentum, the ECB’s tightening bias suggests an acceptance that inflation control must take precedence over growth risks.

The Bank of England, too, is contending with competing pressures. A narrow vote to keep rates unchanged at 4% highlights internal divisions. While economic sentiment weakened following the government’s tax-heavy budget, continued elevation in food prices and lingering supply constraints complicate any move toward easing. Markets expect a modest cut in December but project only limited easing through 2026. The cautious trajectory signals that the BOE is wary of prematurely declaring victory over inflation.

The Fed as the Outlier: Why U.S. Policy Still Tilts Toward Easing

While other major central banks shift toward neutrality or tightening, the U.S. Federal Reserve stands apart. Its latest decision to cut rates in a divided vote reflects a complex domestic backdrop marked by cooling inflation, slowing job gains, and political pressure for more accommodative policy. However, the cut also came with a strong signal that the easing cycle may soon end. Fed projections indicate just one 25-basis-point reduction in 2026, suggesting that stability—not continued cuts—may define the next phase of U.S. policy.

The divergence between the Fed and its global peers stems from structural differences in inflation composition and economic drivers. The U.S. has seen more pronounced disinflation in goods, more dynamic labour-market rebalancing and earlier correction in wage pressures. Meanwhile, energy independence has shielded the U.S. from some external price shocks affecting Europe and Asia. These factors allow the Fed more flexibility to maintain a supportive stance while still projecting confidence in long-term economic resilience.

However, political tension looms in the background. The White House has vocally advocated for deeper rate cuts to support growth ahead of elections, but the Fed is positioning itself for cautious neutrality. Forecasts for faster GDP expansion, lower inflation and steady employment may temper political criticism, but the risk of policy disagreement remains.

Despite the Fed’s easing bias, U.S. financial markets do not appear rattled by the prospect of fewer cuts in the future. Equity indices remain buoyant, supported by expectations that rate hikes are off the table. For investors, the Fed’s stance is less about stimulus and more about providing stability amid a patchy global outlook.

The emerging global pattern is clear: most major central banks are preparing for a world where inflation remains structurally higher than before the pandemic, and where policy will need to be more nimble. The United States, for now, remains the exception—its cuts continuing even as others inch back toward hiking mode—reflecting the unique interplay of economic resilience, political dynamics and the Fed’s inflation outlook.

(Adapted from Reuters.com)

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