Vanguard economic update: More interest rate cuts expected
3 minute read
Markets and Economy

Vanguard economic update: More interest rate cuts expected

Our experts’ latest views on the global economy, including the outlook for growth, inflation, jobs and interest rates.

The global economic landscape shows signs of softening, particularly in the US and UK jobs markets, while Japan faces a wage-price spiral due to a structural labour shortage.

Central banks, including the US Federal Reserve, Bank of England and Bank of Japan, are expected to take measured actions such as rate cuts to navigate these challenges.

Here’s how the latest developments are affecting the US, Europe, the UK, Japan and China.

United States

Recent trade developments have helped reduce some uncertainty for the US economy, leading us to modestly increase our baseline assumption for the effective tariff rate. However, more information is needed to assess the impact of higher tariff rates being passed onto consumers.

There are growing indications that the labour market is losing momentum, with hiring slowing and wage growth becoming less pronounced, while inflation also appears more stable.

We think that core inflation, which excludes volatile food and energy costs, will end the year at 3% and that the Federal Reserve will lower interest rates gradually to help keep the economy on track without letting inflation get out of hand.

Euro area

While the recent trade agreement between the European Union and the US may have reduced some uncertainty, our economic outlook remains the same. We still expect growth to moderate in the second half of the year due to slowing global activity and elevated policy uncertainty, and for inflation to fall below 2% by the end of 2026. We expect just one more interest rate cut in this cycle, bringing the policy rate down to 1.75% by year-end.

United Kingdom

The UK job market is also showing signs of continued weakness. Employment dropped for the sixth month in a row in July, marking the eighth decline in the past nine months. Over this period, about 165,000 jobs have been lost, and the number of job vacancies is also falling.

As the job market and wage growth slow down, we expect to see a reduction of services inflation, which has been running at around 5% in recent months. We think inflation will settle just above 2% by the end of 2026.

Further fiscal tightening, such as lower government spending or higher taxes, seems likely, and we anticipate that the Bank of England will continue lowering interest rates every quarter. This would put interest rates at 3.75% at the end of 2025 and 3.25% by mid-2026.

Japan

Japan is experiencing a persistent labour shortage, which is helping to create a positive cycle of wage increases and price rises in a country that has long battled with deflation. Inflation remains above the target level, and the job market is tight, with improvements in employment and income boosting domestic spending.

After the tariff agreement with the United States in July, corporate sentiment is starting to recover. While recent increases in import prices and food costs are expected to ease, underlying inflationary pressures are still present.

Looking ahead, we expect the Bank of Japan to continue to gradually normalise its monetary policy. This means moving from the current 0.5% interest rate towards a more neutral stance of 1%, as economic conditions align with forecasts.

China

We have raised our 2025 GDP growth forecast to 4.8% from 4.6%, thanks to better-than-expected GDP growth in the second quarter of 2025. However, the relatively mild impact of tariff increases and the strong growth we've seen so far this year might reduce the need for further policy support.

We expect growth to slow down in the second half of the year, as the positive effects from early exports and consumption will fade and weakness in the property sector persist. The journey back to stable inflation is likely to be gradual and bumpy.
 

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