England, Japan hold interest rates steady even as US, Europe cut back: What explains the differences?

The past few days have been quite busy for central banks around the world. There have been multiple interest rate decisions amid efforts to balance inflationary pressures with economic uncertainties and regional challenges.

The past two weeks, it has been a season of cuts and pauses.

Bank of England holds steady amid rising UK inflation

The Bank of England (BoE) on Thursday (December 19) held its benchmark interest rate at 4.75 per cent, pausing after two cuts earlier this year.

The decision comes as inflation in the UK ticked up to 2.6 per cent annually, raising concerns about price stability.

“We need to make sure we meet the two per cent inflation target on a sustained basis,” BoE Governor Andrew Bailey said in a statement.

The expected rate decision came after Bank of Japan (BoJ) took a similar call on its interest rates.

BoJ warns of Trump-related uncertainties

BoJ held its rates steady at 0.25 per cent on Thursday.

The bank’s Governor Kazuo Ueda reiterated the possibility of raising rates if Japan’s economy and inflation develop as anticipated.

He also cautioned against the risks posed by global economic volatility, including the potential impact of the Trump administration’s policies on trade and financial markets.

That move came a day after the US Federal Reserve announced rate cuts.

Fed slows pace of US rate cuts

On Wednesday, the US Federal Reserve cut its key interest rate by 0.25 percentage points, while signalling a slower pace of reductions in 2025.

The Fed’s updated projections showed just two cuts expected next year, down from an earlier forecast of four, as inflation forecasts were revised upward from 2.1 per cent to 2.5 per cent for 2025.

ECB’s rate cuts

The European Central Bank (ECB) last week cut eurozone interest rates again, with President Christine Lagarde citing a “losing momentum” in the region’s economy.

Lagarde hinted at further reductions as inflation eases and the eurozone faces economic headwinds exacerbated by geopolitical uncertainty.

Global challenges shaping monetary policy

After aggressive rate hikes in 2022 and early 2023 to combat surging inflation fueled by energy and food costs, central banks are increasingly turning their attention to rate cuts to support growth. However, the pace and scale of these cuts vary widely depending on regional conditions.

The US is prioritising slower and more measured adjustments, while the BoE grapples with renewed inflationary pressures.

Meanwhile, the BoJ remains cautious, awaiting clearer signals from global economic trends.

The ECB is on course to take the biggest stride in cutting down rates, by far.

With inputs from agencies