OECD's latest forecast: The global interest rate cut cycle will end in 2026!
According to the latest forecast from the OECD, major central banks such as the Federal Reserve and the European Central Bank may have few "bullets" left under the dual pressures of high debt and inflation.
The latest forecast from the Organisation for Economic Co-operation and Development (OECD) shows that major economies will end the current rate-cutting cycle by the end of 2026. This means that despite slowing growth expectations, most major central banks have little room to further ease policy.
The organization expects that the Federal Reserve will only cut rates two more times before the end of 2026, and then keep the federal funds rate between 3.25% and 3.5% throughout 2027. The Fed is trying to strike a balance between the inflationary effects of tariffs and a weakening labor market.
The OECD released this forecast on Tuesday as U.S. President Trump is preparing to nominate a new Federal Reserve Chair, who will face significant pressure to lower borrowing costs.
The OECD stated that it does not expect further rate cuts in the eurozone or Canada, but Japan will steadily tighten monetary policy as local inflation stabilizes around 2%. In the UK, the Bank of England's rate cuts "will stop in the first half of 2026," according to the OECD, and the Reserve Bank of Australia is expected to reach a similar point in the second half of the year.
The latest estimates indicate that in many countries, interest rates need to remain above pre-pandemic levels to control inflation, partly because public debt levels are higher than typical in the past. "In many developed economies, real policy rates are already close to or within the estimated range of the real neutral rate, and by the end of 2027, all economies are expected to be in this position," the OECD said.
The organization believes that the global economy has so far performed better than expected in resisting the shock of Trump’s tariffs, with GDP expected to grow by 3.2% in 2025, then slow to 2.9% in 2026, and rebound to 3.1% in 2027, roughly in line with the latest forecasts from the International Monetary Fund (IMF). This is partly due to a surge in AI-related investment, which has boosted industrial production in the United States and many Asian economies.
The OECD now expects the U.S. economy to grow by 2% in 2025, higher than its mid-September forecast of 1.8%, and that growth in that year will gradually become less reliant on AI. Although the effects of tariffs will gradually emerge and growth will slow next year, the slowdown will be less severe than previously expected, with GDP growing by 1.7% in 2026. The OECD has also raised its 2025 forecasts for the eurozone and Japan, both now expected to grow by 1.3%.
The OECD believes that the UK will perform better than expected in 2026, with the growth rate slowing from 1.4% this year to 1.2%, rather than the 1% predicted by the organization in September. However, Åsa Johansson, Director of Economic Policy and Research at the OECD, said that global expansion is "fragile and should not be taken for granted."
The OECD warned that if optimism about AI fades, a sudden repricing of assets could be amplified by "forced asset sales" from non-bank financial institutions, which are increasingly intertwined with the traditional financial system.
The organization also urged governments to use this relatively stable period to address the rising debt burden. The OECD pointed out that only a few countries, including France, Italy, Poland, and the UK, plan to significantly tighten fiscal policy in the next two years. It also added that the UK government's move to increase the tolerance for its fiscal rules in last week's budget was "prudent."
The OECD said that countries like Germany have room to increase debt and can "maintain higher defense spending for a period of time," but even so, the pressure to increase spending on healthcare, care, and climate measures "will eventually exhaust fiscal leeway."
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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