Are There Rate Shifts Ahead?

The global interest-rate landscape is entering a period of uncertainty. Diverging monetary policies and geopolitical developments are shaping the outlook. According to RHB Research and UOB Bank, the US Federal Reserve (Fed) and the European Central Bank (ECB) are expected to cut rates in 2025, but the trajectory remains clouded by inflation trends, economic resilience and political risks. RHB Research sees a more aggressive Fed rate cut cycle, while UOB Bank expects a more measured approach. Meanwhile, the ECB appears set on multiple cuts to support the struggling European economy.

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RHB Research maintains its forecast of three US Fed Funds Rate (FFR) cuts in 2025, citing inflation uncertainty, a resilient labour market and an elevated current rate. However, UOB Bank takes a more cautious stance, predicting just one cut in 2025.

 

UOB Bank expects rates to stay at 4.25% for the rest of the year, before two cuts next year – one each in 2Q26 and 3Q26 – after Powell steps down as Fed chair in May 2026. This will bring the terminal rate to 3.75% in 3Q26. The debate over rate cuts is shaped by US economic resilience.

 

The return of Donald Trump as president could introduce inflationary risks, with his policies on tax cuts, deregulation and tariffs likely to have “material macroeconomic and financial market impact to the United States and globally”.

 

While the Fed is expected to move cautiously, the ECB appears more committed to easing. RHB Research sees three more ECB rate cuts in 2025. The research house anticipates the next reduction will be in March, with officials possibly dropping their description of rates as “restrictive”. The rationale behind the ECB cuts is a weak economic outlook.

 

It also points out that past ECB comments suggest neutral rates are between 1.75% and 2.5%, implying further room for cuts. The expected rate differentials between the United States and Europe could boost the US dollar in the short term.

 

Trade-related risks arise, with the Trump administration imposing the first wave of tariffs on Canada and Mexico at 25% and China at 10%. These tariffs when implemented could potentially introduce fresh inflationary pressures, complicating the outlook for central banks.

 

With inflation trends still uncertain, geopolitical risks unfolding and policy decisions in flux, the global interest-rate outlook remains anything but settled. As central banks navigate these complexities, every move they make – and every political development that unfolds – will keep markets on edge, ready to recalibrate expectations at any moment.

 

For Malaysia, the likelihood is OPR will remain unchanged at 3% for 2025, unless inflation pressures result in an increase (of OPR). The key is to watch the differentials in real rates between the Fed Fund and OPR. Hopefully, BNM will minimise the differential and keep the exchange rate on even keel.

 

Reference:

Rate shifts ahead, Star Biz7, The Star, 8 February 2025