The rich world’s rate-cut narrative is stalling as the last major policy meetings of 2025 approach. After a year that began with expectations of a steady easing cycle, rate-cut momentum is fading as central banks step back to gauge whether prior easing is rekindling inflation or simply cushioning slowing growth. The “when do cuts restart” debate is quickly becoming “are we done.”
Markets are adapting in real time. Money markets are now pricing almost no further cuts from the ECB, and even embed roughly a 30% chance of an ECB hike by end-2026. In Australia, RBA Governor Michele Bullock’s signal to remain data-dependent helped push swaps to imply almost two 25 bp increases by the end of next year. The common thread is that disinflation progress is no longer enough. Policymakers want proof inflation will stay controlled as labor markets soften only gradually.
Why the hesitation now. One big reason is the uncomfortable mix of still-elevated core inflation and only modest growth. CME analysis notes that across 21 large floating-rate economies, inflation runs about 1% above targets on average, and core inflation has risen about 0.2% over the past six months. Meanwhile, unemployment is drifting higher in several places even without mass layoffs, making central banks reluctant to overtighten. Add in persistent fiscal deficits, and you have a recipe for policy staying restrictive longer than investors hoped.
Likely next steps are a 2026 defined by divergence rather than synchronized easing. CME points to U.S. rate expectations centered around 3% fed funds by end of next year, with potential tightening risk in Australia and Japan, and the possibility of a later turn higher in Europe. Reader takeaway: portfolios tied to “global cuts = easy tailwinds” should stress-test for higher-for-longer and renewed FX volatility if policy paths split.
