The Global Rate-Cutting Cycle Is Over: 32 Cuts in 2025, Now Central Banks Are Hiking Again

In 2025, nine of the ten central banks overseeing the world’s most actively traded currencies cut interest rates. The Federal Reserve cut three times. The European Central Bank cut four times. The Bank of England cut four times. The Swiss National Bank cut to zero. In total, 32 rate cuts delivered 850 basis points of cumulative easing across the developed world — the highest number of cuts since 2008 and the largest scale of easing since 2009. For most of the year, the direction of global monetary policy was unambiguous: down.

That cycle is over. KPMG’s June 2026 Central Bank Scanner — the most comprehensive monthly tracker of monetary policy globally — declared it plainly: the rate-cutting cycle has ended, and some banks are eyeing rate hikes. As the first half of 2026 closes, the ECB has hiked, the BOJ has hiked, the Fed is holding with a hawkish lean, and the Reserve Bank of India is expected to hike. The fastest monetary easing cycle since the global financial crisis has given way to the fastest reversal since the post-pandemic tightening of 2022.

How We Got Here: The 2025 Easing Wave

To understand why the reversal is so jarring, recall what 2025 looked like. Inflation was falling across the advanced world. Central banks that had spent 2022–2023 hiking aggressively — the Fed from 0% to 5.25%, the ECB from 0% to 4%, the BOE from 0.1% to 5.25% — began unwinding. The narrative was “mission accomplished.” The Fed started cutting in September 2025, delivering 75 basis points across three meetings. The ECB had been cutting since mid-2024, accumulating 100 basis points of easing through the year. The BOE matched with 100 basis points. Only the Bank of Japan moved in the opposite direction, raising rates by 50 basis points as it exited its decades-long zero-rate experiment.

By December 2025, the consensus was that 2026 would bring more of the same: further easing, a gradual normalisation, perhaps a soft landing for the global economy. ING published a 2026 outlook projecting continued cuts from the Fed and BOE. Bloomberg consensus had the Fed funds rate reaching 3.0% by year-end. Markets were pricing in two to three additional cuts from most major central banks.

Then the Strait of Hormuz closed.

The Hormuz Shock: From “Last Mile” to “Second Wave”

The Iran-US conflict and the closure of the Strait of Hormuz in early 2026 was the exogenous shock that ended the easing cycle. Roughly 20% of the world’s oil and 25% of its liquefied natural gas transit the strait. Closure sent Brent crude above $111 per barrel, diesel prices surging, and fertiliser costs up 46%. The supply-side inflation that central banks had spent two years beating was back within weeks.

The inflation transmission was rapid. In the United States, headline CPI climbed to 4.2% by May 2026, with core CPI at 2.9%. The Fed had cut to 3.50–3.75% on the assumption that inflation was trending toward 2%. It was now trending away from 2%. PCE inflation, the Fed’s preferred measure, rose to 3.8% headline and 3.3% core in April. The June dot plot showed 9 of 18 FOMC officials projecting at least one rate hike in 2026, with 6 anticipating at least two. Chair Kevin Warsh committed publicly to price stability in language that unmistakably signalled a hawkish hold, not an imminent cut.

In the eurozone, the trajectory was even more dramatic. HICP inflation rose from 2.1% in December 2025 to 3.0% in April and 3.2% in May. The ECB hiked its deposit facility rate to 2.25% on June 11 — its first increase in over a year. President Lagarde said neither further hikes nor cuts were being discussed at present, but markets read the upgraded growth outlook as signalling that the next move could be another hike. An institution that had been cutting for over a year reversed direction in the space of two meetings.

The BOJ: Still the Outlier, Still in the Same Direction

The Bank of Japan was the only major central bank that hiked throughout 2025 — raising rates by 50 basis points while every peer was cutting. In June 2026, the BOJ hiked again to 1.00%, and raised its core inflation forecast from 1.9% to 2.8%. Bloomberg projects a further hike to 1.25% at the July 31 meeting. The yen, at roughly 158–160 per dollar, remains under pressure despite the tightening — the interest rate differential with the US is still over 250 basis points, sustaining carry trade flows that keep the yen weak.

What has changed is that the BOJ is no longer the lonely contrarian. Six months ago, it looked like an idiosyncratic story — Japan emerging from deflation while everyone else eased. Now it looks like the BOJ was simply first. The ECB, RBA, and potentially the Fed and RBI are following the same path, just with a lag. What appeared to be the great rate divergence is converging into a global tightening.

The Emerging Market Trap

For emerging markets, the end of the global easing cycle is not just a reversal — it is a trap. The logic of the 2025 cutting cycle was supposed to work like this: the Fed cuts, the dollar weakens, emerging market currencies strengthen, imported inflation falls, EM central banks can also cut, growth recovers. The opposite is happening. The Fed has stopped cutting. The dollar remains firm (DXY near 99). Emerging market currencies are under pressure. And the Hormuz-driven energy price spike has imported inflation directly into economies that spend a far larger share of household income on food and fuel than advanced economies do.

The IMF downgraded expected 2026 EM growth from 4.2% to 3.9% in its April World Economic Outlook and raised the EM inflation forecast from 4.8% to 5.5%. The Peterson Institute noted that most emerging-market central banks are now following the Fed rather than diverging from it — unable to cut for growth because currency depreciation would amplify inflation. Turkey holds at 40%. Markets expected a 909-basis-point cut in 2026; it has delivered none. Brazil managed a cautious 25-basis-point cut to 14.25% in June but is proceeding at a fraction of the pace markets anticipated. Nigeria, where markets expected 700 basis points of cuts, has cut far less. The easing that was supposed to fuel an EM recovery in 2026 has largely failed to materialise.

The PIIE frames this starkly: a Federal Reserve hawkish pivot heavily dictates global liquidity, forcing emerging market central banks to abandon planned rate cuts and consider hikes to defend their currencies. The sovereign debt interest payment crisis that is already straining government budgets in Sri Lanka, Ghana, Egypt, and Pakistan will worsen if global rates stay elevated. Some $12.1 trillion in non-OECD sovereign bonds are outstanding, with 24 countries having more than 50% of their bonds maturing by 2027. Refinancing at current yields will crowd out development spending for a generation.

The Hormuz Peace Deal: Relief, Not Reversal

The June 14 Hormuz peace deal brought Brent crude down from $111 to approximately $83 per barrel — a substantial relief for energy importers. But central banks are not reacting to oil prices. They are reacting to the inflation that oil prices already caused. The ECB’s June hike came after the peace deal, not before it. Energy price declines take 3–6 months to transmit through supply chains into consumer prices. Eurozone HICP in May was 3.2%, and the flash estimate for June (due July 1) is not expected to show a significant drop. US headline CPI at 4.2% reflects Hormuz-era energy costs that will take months to unwind.

More fundamentally, the inflation rebound exposed a vulnerability that had been papered over by the 2025 easing narrative: the “last mile” problem. Core inflation in both the US and the eurozone never fell cleanly to 2% targets during the cutting cycle. Services inflation, wage growth, and shelter costs remained sticky even as goods disinflation drove headline numbers lower. The Hormuz shock did not create this underlying inflation. It revealed it, and in doing so made it impossible for central banks to keep cutting their way toward a soft landing.

What H2 2026 Looks Like

The second half of 2026 will be defined by this new reality: rates are not going lower. For markets that priced in continued easing, the adjustment will be painful. For governments that assumed cheaper borrowing costs, the fiscal arithmetic is deteriorating. For emerging markets that needed cheaper dollars, the path to recovery just got longer.

The key dates: the Federal Reserve meets July 30, where the decision will be hold-or-hike. The Bank of Japan meets July 31, where a further 25bp hike to 1.25% is projected. The IMF releases its July World Economic Outlook around July 22, which will incorporate the post-Hormuz-peace-deal baseline. These events will determine whether the current pause becomes a new tightening cycle or whether the peace deal’s energy price relief eventually permits a cautious return to easing.

The balance of evidence suggests the former. Inflation has a ratchet quality that central bankers understand viscerally after the 2021–2023 experience: it takes longer to bring down than it takes to build up, and the political cost of letting it re-accelerate is higher than the economic cost of keeping rates elevated. The 32 cuts of 2025 were the exception, not the rule. The higher-for-longer paradigm that seemed to end last year is reasserting itself — and this time, it applies to the ECB and BOJ as well as the Fed.

The easing cycle gave the global economy one year of relief. The bill is now arriving. How much it costs depends on whether the peace deal holds, whether core inflation proves as sticky as services data suggests, and whether emerging markets can weather another year of expensive dollars without a sovereign debt cascade. None of those questions have comfortable answers.

Explore how interest rate changes affect economies worldwide on our global rankings page, or compare monetary policy environments across countries with our country comparison tool. For details on the world’s largest economies and how they navigate these rate pressures, see our 2026 recession map.