The US Federal Reserve expectedly cut interest rates by 25 basis points in its third straight interest rate cut since Covid-19, but only pencilled in two quarter-point cuts in 2025, signalling greater caution over how quickly they can continue reducing borrowing costs.
US policymakers voted 11-to-1 to lower the US central bank’s key lending rate to between 4.25 per cent and 4.50 per cent. They also pencilled in just two quarter-point rate cuts for next year, down from an earlier prediction of four, and sharply hiked their inflation outlook for 2025.
New quarterly forecasts showed several officials pencilling in fewer rate cuts for next year than they estimated just a few months ago. They now see their benchmark rate reaching a range of 3.75 per cent to 4 per cent by the end of 2025.
Investors had baked in expectations that the Fed will announce a quarter percentage point yesterday. The latest rate cut builds on the Fed’s action in November and September, when it kicked off its easing cycle with a large reduction of half a percentage point, and pencilled in additional cuts for this year.
CBUAE cuts rate
Shortly after the Fed's announcement, the UAE Central Bank too decided to cut the base rate applicable to the Overnight Deposit Facility (ODF) by 25 basis points from 4.65 per cent to 4.40 per cent, effective from Thursday, December 19.
"This decision was taken following the US Federal Reserve’s announcement today to reduce the Interest Rate on Reserve Balances (IORB) by 25 basis points," the Central bank of the UAE said in a statement. "The CBUAE has also decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the Base Rate for all standing credit facilities."
(The Base Rate, which is anchored to the US Federal Reserve’s IORB, signals the general stance of monetary policy and provides an effective floor for overnight money market interest rates in the UAE.)
Higher inflation in 2025
The Fed has made progress tackling inflation through interest rate hikes in the last two years, and recently began paring back rates to boost demand in the US economy and support the labor market.
But in the last couple of months, the Fed's favored inflation measure has ticked higher, moving away from the bank's target, and raising concerns that the US central bank's battle is not over.
While inflation has "eased significantly," the level remains "somewhat elevated" compared to the Fed's long-term target of two percent, Chair Jerome Powell said Wednesday. He added that the Fed was now "significantly closer" to the end of its current easing cycle.
- with inputs from Agencies
