December marked a turning point for major central banks, with policy decisions that signalled a shift away from the emergency footing of recent years.
In the US, the Federal Reserve cut rates by 25 basis points in its final meeting of the year, but this was no re-entry into an easing cycle. With its 2026 outlook showing just one more cut planned, the Fed appeared to be drawing a line under the policy support phase. Incoming data made that caution look reasonable. Inflation and jobs figures were weaker than expected, but noise from earlier data delays left the underlying trend unclear.
The Bank of England also lowered its policy rate by 25 basis points, but the decision was narrow and far from a strong signal. Inflation has eased and employment data suggests some cooling, yet the Bank remains wary of declaring victory. Markets took the move in stride, and sterling remained firm.
In the eurozone, the European Central Bank left rates unchanged but surprised with stronger forecasts. Growth and inflation expectations for the coming years were revised higher, mostly due to persistent price pressures in services. The ECB offered no new guidance, and the euro gained modest ground, helped by a relatively constructive outlook compared with the US and UK.
Japan stood apart by raising rates, the first step of normalisation in a long period of extreme policy accommodation. The decision reflected concerns over the yen and domestic fiscal stability, but markets were unconvinced. The yen weakened further in December, with investors sceptical that the Bank of Japan can move much further without political pushback or economic fallout.
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