S&P Global — 29 January 2025
Daily Update: January 29, 2025
The End of Alignment: Global Interest Rates Diverge
By Nathan Hunt
Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy
For years, interest rates set by the major central banks moved in near tandem. During the COVID-19 pandemic, many leading central banks lowered interest rates to around zero, only to significantly raise them to combat inflation. But the strength of the US economy relative to other major economies is leading to a divergence in interest rates. S&P Global Market Intelligence has examined these diverging paths.
S&P Global's latest Purchasing Managers’ Index (PMI) surveys point to the strength and resilience of the US economy. Typically, any PMI measure higher than 50 represents a growing economy. The US headline composite index reading for December 2024 was 55.4, compared with the UK’s 50.4 and the eurozone’s 49.6. Due to these diverging trajectories, the Bank of England and the European Central Bank appear likely to cut benchmark interest rates steadily this year. Meanwhile, the US Federal Reserve has adopted a more cautious posture toward further rate cuts. While futures markets are still pointing toward a 25- to 50-basis-point cut by the end of 2025, the projected scale of this cut and the certainty that cuts are imminent have decreased in the last few months.
"We got accustomed to those relationships being very synchronized, and now you're starting to see imbalances in the global economies due to the pandemic get filtered out," John Sidawi, vice president and senior fixed-income portfolio manager at Federated Hermes, said in an interview with S&P Global Market Intelligence. "It's very easy to present an argument in Europe to cut rates further, but it's more delicate right now in the US."
Globally, there is already considerable variability in interest rates. Benchmark interest rates in the US stand at 4.25% to 4.50%. For the ECB, the deposit facility interest rate is 3%, with further reductions expected in 2025. The Bank of Japan is in a unique position of trying to reverse decades of near-zero interest rates to combat deflation. It raised interest rates 25 basis points in 2024, with further increases predicted. Many emerging markets have external debt denominated in US dollars. This forces central bankers in those areas to anticipate Fed actions. In 2024, Indonesia hiked interest rates to combat a decline in the rupiah.
Interest rates in China and India have also diverged. India, riding a strong and growing economy, raised its policy interest rate to 6.5%, while China lowered this rate to 3.10%.
Today is Wednesday, January 29, 2025, and here is today’s essential intelligence.
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—Read the article from S&P Global Market Intelligence
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—Read the article from S&P Global Ratings
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