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Review of December Monetary Policies in the World’s Six Largest Economies
Since the second half of the year, major global economies have faced varying degrees of inflationary pressure, geopolitical uncertainties, and slowing economic growth. Central banks worldwide have responded by adjusting their monetary policies. Below are the highlights and future outlooks of monetary policy decisions from the six largest economies in December:
United States
The Federal Reserve (Fed) lowered the federal funds rate by 25 basis points (bps) to a target range of 4.25%-4.50% in its December meeting, aligning with market expectations. In its statement, the Fed maintained the narrative from its September rate cuts but introduced the terms “extent and timing” regarding future rate reductions. This signals a slower pace of easing in 2024, with decisions likely dependent on economic data.
Economic forecasts were revised upward, with GDP growth projections for 2024 and 2025 raised to 2.5% (previously 2.0%) and 2.1% (previously 2.0%), respectively. However, the Fed also raised its core inflation forecasts for 2024-2026, citing persistent inflationary pressures and uncertainties stemming from policies introduced by former President Trump. Core inflation is now expected at 2.8% (previously 2.6%) in 2024, 2.5% (previously 2.2%) in 2025, and 2.2% (previously 2.0%) in 2026, with inflation returning to the 2% target only by 2027.
The Fed’s dot plot indicates that interest rates will decrease to 3.75%-4.0% in 2025 (previously 3.25%-3.5%), with a further reduction to 3.25%-3.5% in 2026 (previously 2.75%-3.0%). The long-term neutral rate was also revised downward to 3.0%-3.25%. These projections align with market expectations for narrower rate cuts next year.
Additionally, the Fed adjusted the overnight reverse repo rate to the lower bound of the federal funds rate, signaling a faster depletion of excess market liquidity. Discussions about ending balance sheet reduction are expected to intensify by Q1 2025.
China
The People’s Bank of China (PBOC) maintained the 7-day reverse repo rate at 1.5% in December, with the one-year and five-year loan prime rates (LPR) unchanged at 3.1% and 3.6%, respectively, meeting market expectations.
Despite the introduction of fiscal policies in May and a comprehensive easing package in September, including cuts to the reserve requirement ratio (RRR), interest rates, and mortgage rates, the impact on consumer and business confidence has been limited. Domestic demand and investment have shown little improvement, with deflationary risks persisting.
In response to sluggish demand, the government announced at the annual Central Economic Work Conference that it will adopt more proactive fiscal policies in 2025, raising the fiscal deficit ratio (expected to increase by 1 percentage point to 4%). The government also indicated a shift to “moderately loose” monetary policy, hinting at larger RRR and interest rate cuts next year.
Specific policy details remain unclear and are expected to be disclosed during the National People’s Congress in March when the 2025 economic growth target is unveiled.
Japan
The Bank of Japan (BoJ) kept its benchmark interest rate (overnight unsecured rate) unchanged at 0.25% in December. The central bank reiterated its view of moderate economic growth, supported by improved corporate profits, consumer confidence, and steady consumption. Inflation driven by import prices is expected to ease, while a virtuous cycle of wage and consumption growth should lead to moderate inflation increases.
The decision to hold rates reflects uncertainties in wage and inflation growth as well as global economic and price outlooks. However, dissent emerged within the BoJ, with one member advocating for a 50-bps rate hike, citing heightened inflation risks, highlighting internal divisions on the inflation outlook.
At the press conference, BoJ Governor Kazuo Ueda stated that the central bank would wait for more data on domestic wage growth before considering a rate hike. Ueda noted that clarity on wage trends is unlikely until after spring wage negotiations in March-April, dampening expectations for a January rate hike.
Euro Area
The European Central Bank (ECB) lowered its deposit facility rate, main refinancing rate, and marginal lending rate by 25 bps to 3.0%, 3.15%, and 3.4%, respectively, in December, aligning with market expectations.
The ECB highlighted stronger-than-expected Q3 growth driven by consumer recovery, tourism from the Summer Olympics, and inventory restocking. However, manufacturing weakness, slowing services growth, and increased competition in certain industries have curbed investment and exports.
Facing these challenges, the ECB downgraded its GDP growth forecasts for 2024-2026 to 0.7% (previously 0.8%), 1.1% (previously 1.6%), and 1.3% (previously 1.4%). The central bank also removed the phrase “keeping policy rates restrictive” from its statement, signaling potential further easing if growth weakens further.
Canada
The Bank of Canada (BoC) cut its policy rate by 50 bps to 3.25% in December, marking a cumulative reduction of 175 bps this year, the largest among major central banks.
While rate cuts have supported consumer spending and housing activity, business investment, inventories, and exports remain sluggish. Economic growth for Q3 fell below expectations, with a weak outlook for Q4. Additionally, potential tariffs under Trump’s administration heighten economic uncertainty for 2024.
Despite these challenges, the BoC emphasized a cautious approach to future rate cuts, suggesting a slower pace of easing next year.
Australia
The Reserve Bank of Australia (RBA) maintained its cash target rate at 3.25% in December, one of the few central banks to hold rates steady this year.
The RBA noted mixed economic activity, with Q3 GDP growth at just 0.8%, the slowest pace since 1990 (excluding the COVID-19 period). However, the RBA expressed confidence in inflation easing, signaling that a rate cut may be imminent. Markets expect the RBA to initiate rate cuts as early as February 2024.
Summary In December, global central banks demonstrated cautious approaches to economic outlooks and policy adjustments. The Fed slowed its pace of rate cuts while raising inflation and growth forecasts, reflecting concerns over core inflation and policy uncertainty. China maintained monetary stability amid weak domestic demand and deflationary risks, signaling more aggressive fiscal and monetary measures ahead. The BoJ held rates steady amid internal divisions and wage growth uncertainties. The ECB cut rates and hinted at further easing amid slowing growth. The BoC continued its easing cycle but suggested a slower pace for future cuts, while the RBA held rates steady, with markets anticipating a rate cut next year.