Central banks' decision to reduce interest rates moving forward?
Central banks, such as the US Federal Reserve, the Bank of England, and the European Central Bank, have historically adjusted interest rates in a manner that is generally consistent with market expectations, but not always perfectly timed or sized. These adjustments are largely based on prevailing economic conditions, with some degree of predictability, although surprises do occur.
One key pattern observed in central banking is the pre-crisis gradual increase followed by sharp cuts. For example, prior to the 2008 financial crisis, central banks like the Federal Reserve raised rates gradually as economies overheated, only to cut them sharply after the crisis to near zero in an effort to stimulate recovery.
Following the 2008 financial crisis and during the COVID-19 pandemic, central banks have maintained very low rates for prolonged periods to support economic growth and mitigate downturns. This trend is expected to continue, as the European Central Bank, Bank of England, and Federal Reserve are currently in a cutting frame of mind.
Recently, these central banks have raised rates significantly to combat surging inflation, particularly starting in 2022. These moves generally matched or were closely watched by markets, which had begun to price in tighter monetary policy in advance. However, within the Eurozone, individual countries have exhibited differences in interest rates due to specific economic conditions, highlighting that market expectations can vary by region and that central banks may face complex trade-offs.
In some cases, central banks have paused or held rates despite market uncertainty. For example, in mid-2025, the Federal Reserve held rates steady while acknowledging ongoing economic uncertainty, a move that market watchers had somewhat anticipated but with some debate.
Inflationary tariffs are likely to result from current trade tensions, which are being exacerbated by cheap Chinese exports. If inflation threatens to rise significantly, central banks may tighten more quickly. On the other hand, if inflation stays low, interest rates are expected to remain low as well.
As of September, US inflation was at 2.4%, which is below the barrier for interest rate hikes. In the UK, inflation was at 1.7%, below the Bank of England's 2% target. If memories of 2022, when central banks faced high inflation, influence their responses to inflation in the future, rates could head to 2% or lower for the long-term.
Fiscal policy is becoming looser, especially in the US. The world is becoming more unstable and more prone to shocks. Central banks, including the Fed, Bank of England, and European Central Bank, are expected to continue adjusting interest rates in response to economic conditions and market expectations, with a focus on maintaining a balance between controlling inflation and supporting economic growth. The European Central Bank is also expected to lower interest rates. The Bank of England and European Central Bank are also likely to lower interest rates in response to their respective inflation rates. The Federal Reserve cut interest rates by half a percentage point last month and is expected to cut again in November.
- Central banks, such as the Federal Reserve, the Bank of England, and the European Central Bank, are likely to lower interest rates in response to their respective inflation rates, given that the current inflation rates in the US and UK are below the levels that typically trigger interest rate hikes.
- In addition to adjusting interest rates, central banks may need to consider implementing tariffs as a response to inflationary pressures, particularly if inflation threatens to rise significantly as a result of current trade tensions and cheap Chinese exports.
