OECD: Interest rate cuts by major central banks worldwide will end next year, with very limited room for further easing.

The latest forecast from the Organization for Economic Cooperation and Development (OECD) shows that the interest rate cut cycle of major central banks worldwide will end by the end of 2026, with most central banks having little room for further easing policies amid expectations of slowing growth.

On Tuesday, the institution predicted that the Federal Reserve will only cut interest rates twice more before the end of 2026, and then keep the federal funds rate in the 3.25% to 3.5% range throughout 2027. Currently, the Fed is trying to balance between inflation and weakness in the labor market. This forecast comes as Trump prepares to nominate a new Fed chair, who is expected to face great pressure to reduce borrowing costs.

The report further points out that interest rates in many countries must remain above pre-pandemic levels to curb inflation, partly due to significantly higher levels of public debt compared to previous norms.

Most major global central banks may soon end the easing cycle

OECD's latest forecast indicates that major global central banks will gradually end their easing cycles. The Eurozone and Canada are expected to have no further room for rate cuts, the Bank of England will stop cutting rates in the first half of 2026, and the Reserve Bank of Australia may reach a similar point in the second half.

With Japan’s inflation rate stable at around 2%, it is expected to steadily tighten monetary policy. On December 1, Bank of Japan Governor Kazuo Ueda, in a rare move, directly mentioned the upcoming monetary policy meeting on December 18-19 in a speech, saying that a decision would be made “as appropriate” at that time. This statement has significantly boosted market expectations for the Bank of Japan to raise interest rates in December.

The report further analyzes that the real policy rates in many developed economies are now close to or within the "real neutral rate" range, and by the end of 2027, policy rates in all major economies are expected to return to this level. The neutral rate refers to the benchmark monetary policy rate that neither stimulates nor restrains economic growth.

AI investment boosts economic growth outlook

In its latest economic outlook, the OECD generally revised up growth forecasts for major global economies, pointing out that the rapid growth of artificial intelligence investment has become a key driver of industrial production in the United States and some Asian economies.

OECD now expects the US economy to grow by 2% in 2025, up from its September forecast of 1.8%. The report concludes that the economy's dependence on artificial intelligence will gradually decrease over the next year, and overall growth will slow less than previously expected. In 2026, US GDP is still expected to grow by 1.7%.

At the same time, growth forecasts for the Eurozone and Japan for 2025 have both been raised to 1.3%, and prospects for major emerging economies such as Brazil and India have also been revised upward. Although UK economic growth is expected to slow from 1.4% this year to 1.2% in 2026, this is still better than the previous forecast of 1.0%.

Debt risks and policy challenges coexist

Although the global growth outlook has improved somewhat, Asa Johansson, head of economic policy and research at the OECD, warns that current economic expansion "remains fragile and should not be taken for granted."

The OECD urges governments to take advantage of the current relatively stable window to actively address the increasingly severe pressures from public debt. Currently, only a few countries such as France, Italy, Poland, and the UK plan to significantly tighten fiscal policy over the next two years. The organization specifically pointed out that the UK government's recent move to set aside buffer space for fiscal rules in its budget is "prudent."

The report further analyzes that although countries such as Germany still have some room for debt expansion, which can support sustainable growth in defense spending in the short term, long-term spending pressures in areas such as healthcare, pensions, and climate transition will "ultimately significantly squeeze" fiscal policy space.

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