Key Data: Swiss National Bank cuts rates 5x (to 0.25%), Fed delays cuts until 2026, ECB likely to push rates below neutral in 2025.
Policy Split Reflects Economic Realities
Major central banks are pursuing sharply divergent paths in 2025:
- The Federal Reserve holds rates at 4.25%-4.5%, having only slowed quantitative tightening since April. With core PCE inflation showing rebound risks, its first cut is now delayed until 2026 – signaling heightened “last mile” inflation vigilance.
- The European Central Bank has started cutting amid consistently sub-2% inflation, potentially driving rates below neutral this year to stimulate growth.
- Emerging economies act most aggressively: Switzerland’s fifth 2025 rate cut to 0.25% included warnings of FX interventions against trade/geopolitical risks.
Underlying Drivers: Regional Imbalances
Fundamental economic disparities explain the divide:
- US labor markets remain resilient (initial claims at 223k) but rising continuing claims hint at rehiring difficulties.
- Eurozone growth stays anemic, with Morgan Stanley forecasting sub-1% long-term expansion amid weak domestic demand.
- EMs face capital flight pressures: Clean energy investment growth plunged from 24-29% to 11% as developing-nation borrowing costs surge.
Emerging Risks: Debt and Coordination Challenges
Per OECD warnings, developed-world debt now averages 117% of GDP – 9 points above pre-pandemic levels. With limited fiscal space, unilateral monetary easing risks amplifying currency volatility and debt distress. Enhanced cross-border policy coordination is critical to avoid competitive devaluations.