President Trump’s economic pressure weighs on global central banks

The world’s central banks are walking on eggshells in 2025, with President Donald Trump back in the driver’s seat of the U.S. economy.

His return is already affecting global financial systems, forcing policymakers from Tokyo to Toronto to rethink their strategies. The year is expected to bring more rate cuts worldwide, but the pace is slowing. Economists predict advanced economies will shave off just 72 basis points in 2025, far less than in 2024.

Fed freezes the action as inflation lingers

The Federal Reserve isn’t in a rush to hand out more rate cuts. December saw a modest quarter-point reduction, but policymakers are hitting pause for now. Projections for 2025 suggest only an additional half-percentage point cut is on the table, as inflation remains stubbornly above the Fed’s 2% goal.

Chair Jerome Powell is holding firm, saying current monetary policy is tight enough to bring prices under control. Still, some on the committee are skeptical. Trump’s influence isn’t subtle here. His love for low rates and booming stock markets has created friction with the Fed before.

In 2025, the gap between U.S. and eurozone rates is expected to widen, and Trump’s administration is likely to criticize the Fed for holding back. Add his tariffs to the mix, and the Fed’s balancing act becomes even trickier.

Eurozone sticks to steady cuts and Japan hesitates

The European Central Bank (ECB) is moving cautiously but steadily, cutting rates to fight sluggish growth. Policymakers are on track to bring the deposit rate to 2% by mid-year, using small, predictable quarter-point reductions. Calls for larger, more aggressive cuts have been brushed aside.

Inflation in the eurozone is behaving oddly though. Headline inflation is expected to meet the ECB’s 2% target this year, but services inflation is still double that, largely due to wage pressures. Private spending is expected to pick up, but the central bank is not ready to declare victory.

In Japan, Governor Kazuo Ueda faces a tough call. Inflation has stayed above the 2% target for over two years, and the economy is showing signs of life.

A rate hike would help strengthen the yen, but timing is everything. With Trump’s inauguration just days before the Bank of Japan’s January meeting, Ueda might wait until March for more clarity.

The yen is already under pressure, and Trump’s trade policies could worsen the situation. Domestically, Prime Minister Shigeru Ishiba’s minority government is working on a budget.

BOE takes it slow and Canada braces for impact

The Bank of England (BOE) isn’t in a rush either. Governor Andrew Bailey is holding firm on a “once-a-quarter” pace for rate cuts, despite rising domestic inflation and wage growth surprises. Markets expect another cut in February, but of course more will depend on the Labour government’s budget and global trade developments.

Trump’s policies are a big threat here too. Renewed trade tensions could hurt the UK’s fragile recovery, forcing the BOE to rethink its gradualist approach.

Meanwhile, Canada’s central bank is playing defense. After two big cuts in 2024, the Bank of Canada is now slowing down, focusing on fine-tuning its approach. Inflation is stable near the 2% target, but economic growth remains weak, weighed down by sluggish business investment.

Trump’s proposed 25% levy on Canadian goods could devastate the economy. The bank’s governor Tiff Macklem called the tariffs “a major uncertainty” that could already be chilling investment.

China pivots and Russia keeps its cool

China is shifting gears. For the first time in 14 years, the People’s Bank of China (PBOC) is adopting a “moderately loose” monetary policy. Officials have promised rate cuts and lower reserve requirements for banks to counteract looming headwinds from Trump’s potential trade war.

But the PBOC’s options are limited. Rampant yuan depreciation and narrowing bank profit margins are serious concerns. Trump’s aggressive trade stance could push China into a corner, forcing policymakers to act carefully to avoid more economic instability.

The Bank of Russia is an outlier. It held rates at a sky-high 21% in December, despite accelerating inflation. Governor Elvira Nabiullina defended the decision, citing tighter-than-expected monetary conditions. Analysts had expected a hike, but the bank chose to wait.

Persistent inflation tied to Russia’s war in Ukraine has forced the central bank to delay its 4% target to 2026. While Trump looks determined to maintain his friendship with Russia’s president Vladimir Putin, he has also threatened 100% tariffs on any country that ditches USD, something Putin is really into.

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