When Will Interest Rates Go Down?

Interest rate cuts from major central banks have been underway for some time, with the Fed, ECB, and BOE gradually easing policy to support economic growth. However, persistent inflation concerns, and resilient labor markets have left uncertainty around the pace and extent of further cuts. While markets initially priced in a more aggressive easing cycle, policymakers remain cautious, balancing the need for stimulus with inflation risks.

As 2025 unfolds, investors are closely watching economic data and central bank signals for clues on the next moves. Find out what experts predict for the months ahead.

Will interest rates continue to fall?

• US: The Federal Reserve holds its target interest rate at 4.50% and has signaled potential rate cuts later this year, though their pace and magnitude remain uncertain. 
• Eurozone: The ECB recently cut its key rate by 25 basis points to 2.75% but remains cautious about further reductions, closely monitoring inflation.
• UK: The Bank of England keeps its base rate at 4.75% and acknowledges the possibility of future cuts, though timing depends on economic data.
• Canada: The Bank of Canada holds rates at 3% and has hinted at potential cuts later this year.
• Australia: The Reserve Bank of Australia maintains its cash rate at 4.35% and has signaled openness to future reductions.
• Turkey: The Central Bank of Turkey keeps its rate at 45% but may adjust its restrictive policy as inflation pressures ease.
   

Get ready for the next interest rate decision    

From Hiking to Holding: Central Banks Shift Gears

After a period of aggressive interest rate increases, major central banks have signaled a shift in monetary policy. While inflation remains a concern, recent economic data suggests that the most aggressive phase of rate hikes may be behind us. Central banks are now carefully balancing the need to control inflation with the potential risks of overtightening, which could stifle economic growth.

The impact of previous interest rate hikes is still reverberating through the economy, with higher borrowing costs affecting consumers and businesses alike. However, the labor market has remained surprisingly resilient, and fears of an imminent recession have somewhat abated. Central banks are now closely monitoring economic data, including inflation, employment, and consumer spending, to determine the appropriate path forward.

While a return to near-zero interest rates seems unlikely in the near term, the focus has shifted from aggressive tightening to a more nuanced approach which has seen rates drop across major central banks. Central banks are likely to maintain a cautious stance, keeping rates at current levels or implementing smaller rate increases while they assess the impact of previous monetary policy decisions and the evolving economic landscape. The timing and pace of future rate cuts will depend on a complex interplay of factors, including the trajectory of inflation, the resilience of the economy, and the potential for unforeseen events.

The Elusive Path to Lower Rates: A 2025 Perspective

The Federal Reserve initiated a series of interest rate cuts in the second part of last year, marking a significant shift in monetary policy after a period of aggressive tightening. However, the question now is: will these cuts continue, and at what pace?

While markets initially anticipated a more rapid and substantial easing of monetary policy, the Fed has adopted a more cautious approach. The central bank is closely monitoring inflation data, economic growth, and the evolving labor market to determine the appropriate path forward.

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Interest Rates Forecast in the US 

CME FedWatch Tool continue to expect more rate cuts than the market, with year-end 2025 federal-funds rate expectation at 3.25%-3.50%. In December, the Fed predicted it would lower interest rates twice in 2025.

According to Investopedia, almost 60% of traders are expecting at least two quarter-point cuts this year, while about 40% predict we'll see either a single reduction or no cut at all.

Why could interest rates go down in the US from 1Q2025?

Interest rates in the US could decline in 2025 due to several factors. If inflation continues easing toward the Fed’s 2% target, policymakers may feel comfortable cutting rates to support economic growth. A slowdown in the US economy, marked by rising unemployment or weaker GDP, could also prompt rate cuts to prevent a recession. Additionally, global economic weakness may push investors toward safer assets, influencing lower rates. A shift in Fed policy toward a more dovish stance could further accelerate rate reductions.

Why could interest rates in the US stay high for a longer time?

However, several factors could keep interest rates elevated for longer. Persistent inflation may force the Fed to maintain higher rates to control price pressures. Strong economic growth could also deter rate cuts, as reducing borrowing costs might reignite inflation. Geopolitical risks or unexpected global market disruptions may lead the Fed to hold rates steady. Additionally, expansionary fiscal policies, such as increased government spending or tax cuts, could add upward pressure on interest rates. Ultimately, the Fed’s decisions will depend on economic data, inflation trends, and broader market conditions.

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Will interest rates continue to fall in the EU?

The European Central Bank (ECB) has started 2025 by cutting interest rates in January, potentially marking the start of a downward trend expected to continue throughout the year. While inflation in the Eurozone remains a concern, it is showing signs of moderation, allowing the ECB to ease policy without reigniting price pressures. At the same time, sluggish economic growth and contractions in some member states have reinforced the need for lower rates to stimulate activity.

The ECB has taken a cautious, data-dependent approach, balancing inflation control with economic support. Further cuts are likely, but their timing will depend on inflation trends, economic performance, geopolitical risks, and fiscal policy developments across the Eurozone.

The ECB lowered its key rate to 0% in 2016, maintaining the zero-rate policy until July 2022, when it raised Eurozone interest rates to 0.5% – the first-rate hike since 2011 – to curb the soaring inflation.

Since then, the European Central Bank raised interest rates for the ninth consecutive time in July 2023 by a combined 425 basis points since July 2022, worried that price growth could be perpetuated by both rising costs and wages in an exceptionally tight jobs market.

Interest Rates Forecast in EU

The European Central Bank (ECB) initiated its first rate cut of 2025 in January, with further reductions expected as the year progresses. After lowering rates by a total of 100 basis points in 2024, policymakers are projected to implement an additional four to five cuts this year, potentially bringing the deposit rate down to a range of 1.75%-2% by year-end.

Analysts at DWS forecast a series of 25-basis-point cuts at the next four ECB meetings in March, April, and June, as the central bank aims to balance inflation control with economic growth support.

Why could interest rates go down in the EU from 1Q2025?

The European Central Bank (ECB) began cutting interest rates in January 2025, with further reductions expected throughout the year, including in Q1. The decision is driven by several factors, including easing inflation, which while still elevated, shows signs of cooling, giving the ECB space to adjust its policy without reigniting inflationary pressures. Additionally, weakening economic growth across some Eurozone member states has prompted the ECB to lower rates to stimulate activity and support recovery.

The ECB is taking a cautious, gradual approach to rate cuts, balancing the need to bring inflation back to its 2% target while supporting economic stability. The central bank has signaled more rate reductions in 2025, but the extent and timing of these cuts will depend on evolving economic conditions, particularly inflation and GDP growth. Furthermore, geopolitical risks and the interaction between fiscal and monetary policies within the Eurozone will also play a key role in shaping future rate adjustments.

Why could interest rates in the EU stay high for a longer time?

Several factors could lead to interest rates in the EU staying elevated for a longer period. Persistent inflation is a major concern, as if inflation remains more stubborn than expected, the ECB may need to maintain higher rates to control inflationary pressures, particularly if core inflation or wage growth stays high. Additionally, stronger-than-expected economic growth could make the ECB hesitant to lower rates too soon, as robust recovery might reignite inflationary concerns, prompting a more cautious stance. Geopolitical risks also pose a threat, as escalating tensions or unexpected global events could create financial instability, leading the ECB to keep rates higher as a precaution.

Lastly, expansionary fiscal policies by Eurozone governments, such as increased spending or tax cuts, could exert upward pressure on interest rates due to heightened government borrowing competing with private sector demand for funds, potentially driving up borrowing costs.

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When will interest rates go down in the UK?

Despite taking a more cautious approach than the ECB, the Bank of England has already begun lowering interest rates, with further reductions expected throughout the year, which could create a more favorable borrowing environment.

While inflation remains elevated, it is showing signs of moderation, allowing the Bank to relax its monetary policy without worsening inflation. The UK economy is also facing challenges, with some sectors experiencing contraction, and lower interest rates are being used to stimulate economic activity and support growth.

The Bank of England is taking a gradual and cautious approach to rate cuts, focused on bringing inflation back to its 2% target while supporting economic growth. Further rate cuts are anticipated in 2025, but their extent and timing will depend on the evolving economic landscape and inflation trends.

The Bank’s decisions will also be influenced by incoming economic data, particularly inflation and growth indicators, along with geopolitical risks and the impact of fiscal policy on monetary policy decisions.

Interest Rates Forecast in the UK

The BlackRock Investment Institute’s 2025 outlook suggests the BOE may cut rates more than the market expects, while J.P. Morgan Asset Management indicates the Bank could cautiously ease its policy. Goldman Sachs sees strong reasons for continued quarterly rate cuts in 2025.

Morgan Stanley is more aggressive, predicting five cuts throughout the year, with a target base rate of around 3.5% by November. Similarly, Bank of America anticipates a terminal rate of 3.5% by early 2026, implying five rate cuts from current levels.

Why could interest rates go down in the UK in 2025?

The Bank of England has already started reducing interest rates, with further cuts expected throughout the year. While inflation in the UK remains high, it is showing signs of cooling, allowing the Bank to ease its monetary policy without worsening inflationary pressures. The UK economy is also facing challenges, with some sectors experiencing contraction, and lower interest rates are being used to stimulate economic activity and encourage growth.

The Bank of England has taken a cautious, gradual approach to rate cuts, aiming to return inflation to its 2% target while supporting economic growth. Looking ahead, the Bank has signaled that more cuts are likely throughout 2025, though the timing and extent will depend on the evolving economic landscape and inflation trends.

Key considerations such as inflation data, economic growth indicators, and global factors will continue to influence the Bank's decisions.

Why could interest rates in the UK stay high for a longer time?  

The BoE’s updated narrative is likely to be that clear progress is being made on inflation, but that it is too early to declare victory, and therefore caution must be exercised when thinking about when and how quickly policy can be normalized.

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Will interest rates continue to go down in Canada?

The Bank of Canada (BoC) has continued its series of interest rate cuts in 2025, starting with a reduction in January. This trend is expected to continue throughout the year, creating a more favorable borrowing environment for both consumers and businesses in Canada. Several factors are driving this shift.

While inflation remains a concern, it has shown signs of cooling, allowing the BoC to ease monetary policy without reigniting inflationary pressures. The BoC is taking a gradual and measured approach to rate cuts, aiming to bring inflation back to their 2% target while supporting overall economic growth.

The BoC has signaled that further rate reductions are likely throughout 2025, depending on the evolving economic landscape and inflation trends along with the growing uncertainty relating to the political situation with US president Donald Trump taking office in January.

The bank’s decisions will be influenced by incoming economic data, global events, and fiscal policies implemented by the Canadian government.

Interest Rates Forecast in Canada

The Bank of Canada reduced its target for the overnight rate to 3% in January, with the Bank Rate at 3.25% and the deposit rate at 2.95%. According to the BOC website, the Bank is also announcing its plan to complete the normalization of its balance sheet, ending quantitative tightening. The Bank will restart asset purchases in early March, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy.

Projections in the January Monetary Policy Report (MPR) published are subject to more-than-usual uncertainty because of the rapidly evolving policy landscape, particularly the threat of trade tariffs by the new administration in the United States. Since the scope and duration of a possible trade conflict are impossible to predict, this MPR provides a baseline forecast in the absence of new tariffs.

Why could interest rates go down in Canada in 2025?

If the Canadian economy shows signs of facing persistent weakness, characterized by sluggish growth and rising unemployment, the Bank of Canada (BoC) may be forced to lower interest rates further to stimulate economic activity. Additionally, if inflation continues to moderate significantly and falls below the BoC's 2% target, the bank might cut rates to avoid deflationary risks.

A global economic slowdown could also negatively impact Canadian exports and reduce domestic demand, prompting the BoC to lower rates in an effort to mitigate these effects and support the economy.

Why could interest rates in Canada stay high for a longer time?

If inflation proves more persistent than expected, the BoC may need to maintain higher rates for longer to bring inflation back to its 2% target, especially if underlying inflationary pressures, such as wage growth or core inflation, remain elevated. Additionally, if the Canadian economy experiences a stronger-than-expected recovery, the BoC may be cautious about lowering rates prematurely, as robust economic growth could reignite inflationary concerns.

Finally, escalating geopolitical risks or unforeseen global events could introduce uncertainty and volatility into financial markets, prompting the BoC to hold rates higher to safeguard financial stability.

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When will interest rates go down in Australia?

Australia is forecast to experience interest rate cuts in 2025, with forecasts suggesting the first reduction could occur in February, potentially lowering the cash rate to around 3.35% by the end of the year. However, the exact timing and extent of these cuts will depend on economic data and the Reserve Bank of Australia's (RBA) assessment of inflation levels.

Currently, the cash rate stands at 4.35%, and major banks such as CBA, Westpac, NAB, and ANZ predict that the peak rate will remain around this level, with the first cuts anticipated to begin in February 2025.

Interest Rates Forecast in Australia  

Australia's interest rate forecast for 2025 suggests that the Reserve Bank of Australia (RBA) will likely begin cutting rates in the early months of the year. Currently, the cash rate stands at 4.35%. Most of Australia's major banks, including Commonwealth Bank of Australia (CBA), Westpac, National Australia Bank (NAB), and ANZ, predict that this level will remain the peak rate for a while.

However, these banks anticipate that the RBA will start reducing interest rates as early as February 2025, with the first cut expected to be modest. 

Why could interest rates go down in Australia in 1Q2025?

Several factors could lead to potential interest rate cuts in Australia. A weakening labor market, declining consumer confidence, or a significant housing market correction could prompt the Reserve Bank of Australia (RBA) to cut rates to support economic growth. Additionally, a global slowdown could impact exports and growth, leading the RBA to ease monetary policy to cushion the economy.

Why could interest rates in Australia stay high for a longer time?

Interest rates in Australia may remain high due to factors like accelerating wage growth, persistent supply chain disruptions, or unexpected shocks such as natural disasters or geopolitical crises. Additionally, concerns over financial stability or excessive risk-taking in the financial system could prompt the RBA to keep rates elevated.

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Will interest rates continue to go down in Turkey?

The Turkey interest rates forecast for the next 5 years (projected interest rates in 5 years in Turkey) shows the end of the rate-hike cycle. However, the CBT keeps hawkish bias in place.

Turkey's interest rates had a history of extreme volatility, followed by a period of comparatively stable conditions for the majority of the 21st century while the CBT underwent significant structural reforms in the wake of the 2001 financial collapse that precipitated the country's economic catastrophe.

Turkey was mostly successful in keeping inflation around 10% between 2005 and 2017, and interest rates followed suit by remaining quite low. Rates dropped as low as 4.5% in 2013, as the nation moved towards the Western economic paradigm of gradual price growth in the wake of the Great Recession.

In reaction to a substantial increase in inflation in 2019, rates increased as high as 20.35 percent before dropping with the inauguration of a new central bank governor. Rates decreased to 8.25% in response to COVID-19 limits that stifled demand before increasing to 19% by March 2021.

A few days after the increase, Erdogan fired Naci Agbal as governor of the Central Bank of the Republic of Turkey. Since then, the rate has continued to decrease because of the president's insistence. Despite rising prices, it reached 8.5% in March as inflation concurrently ballooned, breaching 80% in late 2022.

As of January 2025, expectations for interest rate cuts in Turkey are based on the rate of inflation. The Turkish Central Bank (CBT) is expected to continue cutting interest rates as inflation eases.

The bank indicated it would continue easing in the months ahead, flagging a temporary rise in January inflation driven mainly by services, even as core inflation remains relatively low with domestic demand at "disinflationary levels".

Interest Rates Forecast in Turkey

As of January 2025, the interest rate set by the Central Bank of the Republic of Turkey (TCMB) was 45%. This was a 2.5 percentage point reduction from the previous rate of 47.5% and another sign the central bank has shifted course.

In a Reuters poll, all 13 respondents forecast a cut to 45% from 47.5% in the one-week repo rate. They expect it to hit 30% by year end, according to the poll median. Annual inflation dipped to 44.38% last month in what the central bank believes is a sustained fall.

Why could interest rates go down in Turkey in 2025?

The central bank may lower interest rates due to weakening economic growth, which could result in rising unemployment and declining consumer confidence, prompting measures to stimulate activity. Additionally, if inflation moderates faster than expected and inflation expectations decline, the central bank may ease monetary policy. A global economic slowdown affecting Turkey’s exports and tourism could also lead to rate cuts to mitigate domestic impact.

Furthermore, while the central bank operates independently, government pressure for lower rates to encourage growth and employment could influence its decisions.

Why could interest rates in Turkey stay high for a longer time?

If inflation, particularly core inflation, remains more persistent than expected, the central bank may need to keep interest rates elevated or raise them further to prevent inflation from resurging. Significant depreciation of the Turkish Lira could also drive inflation and diminish consumer confidence, prompting the central bank to hike rates to stabilize the currency.

In the face of rising geopolitical risks, such as regional conflicts or global instability, the central bank might maintain higher rates to ensure financial stability. Additionally, concerns about external debt could lead the central bank to keep rates high to attract foreign capital and stabilize the currency.

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In sum, will Interest rates go down in Q1 2025?

There is a strong possibility that global interest rates will trend downward in Q1 2025, influenced by moderating inflation, economic challenges, and potential policy shifts from central banks. However, this outcome is not guaranteed, as the direction of interest rates remains highly dependent on several factors, including inflation trends, economic growth performance, and decisions made by central banks in response to changing market conditions.

Central banks could adjust their stance based on emerging economic data, such as employment figures or GDP growth rates, which may lead to rate cuts or further hikes.

Given the uncertainty surrounding these variables, it’s crucial for businesses and individuals to remain vigilant about market trends and policy signals. 

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Sources   
Federal Reserve Board - Home   
European Central Bank (europa.eu)   
Home | Bank of England   
Bank of Canada   
Reserve Bank of Australia (rba.gov.au)   
TCMB   
Interest rates - Long-term interest rates forecast - OECD Data   
Interest Rate - Countries - List (tradingeconomics.com)