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Last edition 2025 - Bank of Japan lifts rates to multi decade high, while US inflation cools more than expected

Japan’s central bank raised its policy rate to the highest level since 1995, as inflation has remained above target for almost four years. The move pushed the Nikkei 225 up around 1.3% and lifted the 10-year government bond yield to 2%, its highest level since May 2006, while the yen weakened slightly to about 156 per US dollar. The Bank of England cut its key rate for the fourth time this year in an expected move amid a drop in inflation. At the same time, the ECB kept interest rates unchanged, as did the central banks of Norway and Sweden. In the US, inflationary pressures eased in November as the consumer price inflation rate declined to 2.7%. 

With this issue, we conclude the year and would like to thank you for your interest. The first issue of the new year will be published on January 5. We wish you and your loved ones a Merry Christmas.

  • Date
  • Author Alessandro Fezzi, Content & Publications
  • Reading time 5 minutes

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Japan’s central bank raised its benchmark interest rate by 25 basis points to 0.75% on Friday, the highest level since 1995, continuing its gradual normalisation of monetary policy as inflation has exceeded its 2% target for 44 consecutive months. The decision pushed the ten-year Japanese government bond yield to around 2.02% and the 20-year yield to about 2.98%, both their highest levels since 1999, while the yen slipped to roughly 156 per US dollar and the Nikkei 225 gained about 1.3%. Despite the move, the Bank of Japan said real interest rates are expected to stay “significantly negative” and projected that core inflation will ease below 2% from April to September 2026, even as it expects firms to keep increasing wages next year. The bank acknowledged recent economic weakness, with third-quarter GDP contracting 0.6% quarter on quarter and 2.3% annualised, but said corporate profits should remain strong, while policymakers balance rising borrowing costs and debt sustainability against the need to address the weak yen and a cost-of-living squeeze.

Major Asia-Pacific stock markets traded higher on Friday, with South Korea’s Kospi up 0.8% and the Kosdaq gaining 1.5%, while Australia’s S&P/ASX 200 added about 0.5%. Hong Kong’s Hang Seng index increased 0.6% and China’s mainland CSI 300 climbed 0.6%, while India’s Nifty 50 advanced around 0.5%. 

Inflation in the US eases

US consumer prices rose by 2.7% year-on-year in November, according to data released by the Labour Department, easing markedly from 3% in September and coming in below economists’ expectations for an increase to around 3.1%. Core inflation, which excludes volatile energy and food components, slowed to 2.6% compared with forecasts of 3%. The report is subject to some uncertainty, as the recent government shutdown from October to mid-November disrupted data collection and left no comprehensive inflation figure for October. 

US stocks recover on softer inflation

Wall Streetstaged a partial rebound on Thursday as lower-than-expected November inflation and a strong outlook from memory chipmaker Micron lifted sentiment, although gains faded toward the close. The Dow Jones Industrial Average edged up 0.1% to 47,951.85 points, while the broad-based S&P 500 rose 0.8% to 6774.76 and the tech-heavy Nasdaq 100 advanced 1.5% to 25,019.37, leaving the latter up about 19% so far this year versus roughly 13% and just over 15% for the Dow and S&P 500. Market optimism about further Federal Reserve rate cuts in 2026 was tempered by concerns that November’s inflation data may be distorted by the partial US government shutdown from October to mid-November, with analysts warning that a clearer picture of underlying price trends may only emerge with December and January figures. Micron jumped 10.2% after reporting robust quarterly results and issuing upbeat guidance on demand for AI-related memory products, boosting peers such as AMD and Nvidia.

Bank of England cuts rates again

The Bank of England lowered its key interest rate from 4% to 3.75% on Thursday, its fourth reduction this year and the final monetary policy decision of 2025. The move, which was anticipated by economists, followed weaker economic data, a softer labour market and a faster-than-expected fall in inflation to 3.2% in November, still above the 2% target. The decision was narrowly approved with a 5-4 vote, and policymakers signalled that while rates are likely to decline further, the pace and extent of additional easing will depend on the inflation outlook and wage dynamics. Economists currently expect further cuts in the first half of 2026, although high wage expectations and a stubborn unemployment rate could keep the central bank cautious.

ECB and Nordics hold rates 

The European Central Bank (ECB) left interest rates unchanged at its meeting on Wednesday, its final gathering of 2025, while modestly lifting its euro-area growth projections to up to 1.4% for next year and 1.2% for 2026. Economists generally expect the ECB to move cautiously on any future rate reductions. Norway’s Norges Bank and Sweden’s Riksbank also kept their key policy rates steady at 4% and 1.75%, respectively, with both central banks signalling that only limited easing is likely in 2026 as inflation remains above target and monetary policy must stay restrictive for now. 

Corporate and economic calendar

Corporate data in focus: There is no major corporate news scheduled today.

Economic data in focus: UK retail sales (08:00), German Producer Price Index (08:00), GfK German Consumer Climate (08:00), Bundesbank monthly report (12:00), US personal consumption expenditures (14:30), Canadian retail sales (14:30), US existing home sales (16:00), University of Michigan US Consumer Sentiment Index (16:00) and euro-area consumer confidence (16:00).

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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