Central Bank decreases rates in December

Latest bank decision: At its meeting on 18 December, the Central Bank decided to lower the target range for the federal funds rate by 25 basis points to 4.25–4.50%.

Monetary policy drivers: The key domestic factors driving the Central Bank's decision were declining inflation and rising unemployment since earlier in the year, even though inflation has ticked up slightly since August and remains above the Fed’s 2.0% target.

Policy outlook: The Central Bank’s own projections are for just 50 basis points of cuts in 2025, a notable revision from the Bank’s September estimate of 100 basis points. This is linked to higher inflation forecasts for 2025 amid the threat of tariff hikes under Trump’s second term. Among our panelists, forecasts range from no cuts to 150 basis points of reductions, with the Consensus about midway between the two extremes.

Panelist insight: UOB’s Alvin Liew said: “We had earlier revised our 2025 rate cut trajectory lower to a total 75 bps of cuts from 100 bps previously, and end the rate cycle to bring the terminal rate to 3.75%. The reduced number of cuts reflect the higher inflation pressures from the projected tariff implementation during the latter part of 2025. We have highlighted that the risk in 2025 is for less cuts due to the uncertainty of tariffs. However. we think it remains premature to shift our projections for now.” Nomura analysts were more hawkish: “We maintain our expectation that the FOMC will only deliver one additional rate cut in 2025. The Fed continues to have an easing bias, but the case that policy is currently restrictive is increasingly uncertain. Meanwhile, the FOMC appears to be acknowledging last-mile risks, and at least a few officials appear willing to be proactive about inflation risks from an incoming Trump administration.”

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