- The Federal Reserve made three rate cuts towards the end of 2025 and will usher in a new Chairman to replace Jerome Powell in 2026
- The Bank of Japan is likely to continue with its new rate hike policy
- The Bank of England lowered rates to the lowest since 2023 and will likely be more cautious in 2026
In 2025, the global financial landscape felt like a high-stakes tug-of-war. People were struggling with grocery costs as central banks tried to balance growth with stubborn inflation. After big rate hikes in previous years, 2025 was split. The Federal Reserve and ECB started to ease up, while the Bank of Japan finally moved away from super-low rates.
These decisions, based on jobs, inflation, and growth data, could lead to different paths in 2026. Let’s check out the main factors that could influence decision making and what might happen next.
The Federal Reserve
The Federal Reserve cut rates three times in 2025, dropping the federal funds rate to 3.5%-3.75% by December, according to its FOMC statement. These moves, totaling 1.75%, were because of progress toward 2% inflation and full employment, but there was still some doubt due to mixed economic signs.
Looking at 2026, the big story is the leadership change, as Jerome Powell’s term ends in May. iShares data suggests the Fed might wait early in the year to let the new Chair get settled, possibly aiming for a neutral target of 3.0% to 3.25% by the end of the year.
Europe (ECB and BoE)
In Europe, the European Central Bank (ECB) was more cautious. After a small cut in June, the ECB kept its main rate steady at 2.15% for the rest of the year. ECB minutes show President Christine Lagarde is happy with what she calls the good place, where inflation is near 2% and growth is slow but positive.
In 2026, the ECB might start to tighten, with some officials saying cuts might end and hikes could happen by the end of the year, according to Bloomberg and CNBC. This is to protect against inflation speeding up again.
The Bank of England (BoE) cut rates multiple times in 2025, finally reducing them to 3.75% in December, the lowest since early 2023, through close votes. In 2026, the BoE will likely keep easing slowly, with economists predicting rates will fall to 3.25%-3.50% through small cuts, according to Capital Economics and Reuters polls, balancing growth support with inflation risks.
Bank of Japan
As for the Bank of Japan (BoJ), the expectation is that they will keep moving away from their long-time policy. In 2025, the Bank of Japan increased its short-term rate twice, hitting 0.75% in December, which is the highest it’s been in 30 years. This was due to ongoing inflation above 2% and wage growth, showing a move away from ultra-low policies. For 2026, Governor Kazuo Ueda has said that if the economy stays on course, more increases are coming, with a neutral rate possibly reaching 1.0%.
Reserve Bank of Australia
The Reserve Bank of Australia held the cash rate at 3.60% for the final meetings of 2025 after earlier cuts, citing persistent inflation around 3% and robust employment, according to RBA statements. As a result, 2026 might bring a hawkish change. Many experts expect the RBA to raise rates again before people feel any help.
The Fed made risk management cuts to safeguard a cooling job market. Even though inflation was a bit over 2%, decision-makers wanted to stop joblessness from increasing too much.
The ECB thinks it’s in a neutral place where its actions aren’t helping or hurting the economy. Since inflation is close to 2%, they’ll probably keep rates where they are through 2026 unless growth really slows down.
The BoJ will probably keep making its policies more normal. With the rate at 0.75%, experts think it might go up to 1.0% or higher in 2026 to fight a weak yen and rising inflation caused by imports.
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