Leading economies will end their current rate-cutting cycles by the end of 2026, according to new Organisation for Economic Co-operation and Development (OECD) forecasts that suggest most major central banks have little scope for looser policy despite an expected slowdown in growth.
The Paris-based organisation expects the US Federal Reserve to cut interest rates just twice more by the end of 2026, before keeping the federal funds rate at 3.25 per cent to 3.5 per cent throughout 2027.
The US central bank is seeking to balance the inflationary effects of tariffs against a weakening labour market.
The OECD published its latest forecasts on Tuesday as US president Donald Trump prepares to nominate a new Fed chair, who will be under intense pressure to lower borrowing costs, and in advance of a finely balanced December rate decision.
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The OECD said it expected no further rate cuts in the euro zone or Canada, but a steady tightening of monetary policy in Japan, where inflation is stabilising at about 2 per cent.
In the UK, rate cuts by the Bank of England “will cease in the first half of 2026”, the OECD said, with Australia’s Reserve Bank set to reach a similar point in the second half of the year.
Its new estimates suggest that, in many countries, interest rates will need to remain higher than pre-pandemic norms to keep inflation in check, partly because public debt is running at higher levels than was previously typical.
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“In many advanced economies, real policy rates are already close to or within estimated ranges for real neutral rates [at which monetary policy is neither boosting nor squeezing economic growth] and all are projected to be so at the end of 2027,” the OECD said.
The organisation argues that the global economy has so far withstood the shock of Mr Trump’s tariffs better than feared, with gross domestic product (GDP) set to expand by 3.2 per cent in 2025 before growth slows to 2.9 per cent in 2026 and 3.1 per cent in 2027, broadly in line with the International Monetary Fund’s latest forecasts.
This is partly because of the surge in artificial intelligence-related investment, which has lifted industrial production in the US and many Asian economies.
The OECD now expects the US economy to expand by 2 per cent in 2025, up from its September interim forecast of 1.8 per cent, with the expansion becoming less reliant on AI over the course of the year.
Growth is still set to slow next year, as the effects of tariffs build, but to a lesser extent than previously expected, with GDP rising 1.7 per cent in 2026.
The OECD has also upgraded its 2025 forecasts for the Eurozone and Japan – both now set to grow by 1.3 per cent – and for big emerging economies including Brazil and India.
The UK will fare better than expected in 2026, the OECD judges, with growth slowing from 1.4 per cent this year to 1.2 per cent, rather than 1 per cent as the organisation had forecast in September.
But Asa Johansson, director of economic policy and research at the OECD, said the global expansion was “fragile and should not be taken for granted”.
A sudden repricing of assets, if optimism about artificial intelligence evaporated, could be “amplified by forced asset sales” by non-bank financial institutions, which were increasingly enmeshed with the traditional financial system, the OECD warned.
It also urged governments to take advantage of a period of relative stability to tackle rising debt burdens. Only a handful of countries – including France, Italy, Poland and the UK – were planning significant fiscal tightening over the next two years, the OECD noted.
It added that the UK government had been “prudent” to increase its room for error against its fiscal rules in last week’s budget.
Countries such as Germany had scope to increase debt, and could sustain higher spending on defence “for some time”, the OECD said, but even here the pressures to spend more on health, care and climate measures “will eventually absorb fiscal room for manoeuvre”. – Copyright The Financial Times Limited 2025
