central banks start cutting rates sud ...
Why rate cuts are on the table Over 2024–2025 inflation in several advanced economies eased toward targets, and some labour-market measures started to show softening. That combination gives central banks room to start trimming policy rates from the highs they set to fight the inflation surge of 2022Read more
Why rate cuts are on the table
Over 2024–2025 inflation in several advanced economies eased toward targets, and some labour-market measures started to show softening. That combination gives central banks room to start trimming policy rates from the highs they set to fight the inflation surge of 2022–24. But central banks are signalling caution: they want evidence that inflation is sustainably near target and that labour markets won’t re-heat before easing further. You can see this tension in recent speeches and minutes.
The Fed (U.S.)
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Where we are: The Fed had cut 25 bps in September 2025 and markets / some Fed officials expected another cut in late October 2025. Fed speakers are split: some favour steady, cautious 25-bp steps; a minority have pushed for larger moves. Markets (Fed funds futures / CME FedWatch) price the odds of further cuts but watch labour and inflation closely.
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Most likely near-term path (base case): another 25 bps cut at the October 29, 2025 FOMC meeting (bringing the target range lower by 0.25%) with further gradual 25-bp moves only if core inflation stays close to 2% and employment softens further. Some policymakers explicitly oppose 50-bp jumps — so expect measured trimming, not a rapid easing binge.
The ECB (euro area)
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Where we are: The ECB’s public materials around October 2025 show the Governing Council viewing rates as “in a good place,” but policymakers differ; some see cuts as the next logical move while others urge caution. Market pricing trimmed the probability of an immediate cut at one meeting, but commentary from officials (and recent reporting) suggested cuts are likely to be the next directional move — timing depends on euro-area inflation persistence.
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Most likely path: smaller, gradual cuts (25 bps steps) spaced out and conditional on inflation falling closer to 2% across member states. The ECB is very sensitive to regional differences (food/energy, services) so it will be careful.
Bank of England (UK)
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Where we are: The IMF and other bodies have advised caution — UK inflation was expected to remain relatively high compared with peers, so the BoE is slower to cut. Market pricing in October 2025 suggested very limited near-term cuts.
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Most likely path: one or a couple of modest cuts (25 bps each) but delayed relative to the Fed or ECB unless UK inflation comes down faster than expected.
Reserve Bank of India (RBI) & some EM central banks
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Where we are (RBI): The RBI’s October 2025 minutes explicitly said there was room for future rate cuts as inflation forecasts were revised down and growth outlook improved; the RBI paused in October to assess the impact of previous cuts. India had already cut rates through 2025, giving policymakers flexibility to ease further, but they’re cautious on timing.
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EMs more broadly: Emerging market central banks vary: some with low inflation can cut sooner; others (with sticky food inflation or currency pressures) will be more hesitant.
How big will cuts be overall?
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Typical increments: Most central banks trim in 25 basis point (0.25%) increments when they move off a restrictive stance — that’s the default, conservative path. Some officials occasionally argue for 50-bp moves, but those are the exception. Expect cumulative easing of a few hundred basis points through 2026 in the most dovish scenarios, but the pace will be gradual and data-dependent. (Evidence: public speeches and minutes emphasise 25-bp moderation and caution.)
Key data and events to watch (these will decide the “when” and “how much”)
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Core inflation prints (ex-food, ex-energy) for each economy.
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Labour market signals: payrolls, unemployment rate, wage growth. Fed watches US payrolls closely.
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Central-bank minutes / speeches (they often telegraph the next step). x
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Market pricing (fed funds futures, swaps) — gives you the consensus probability of meetings with cuts.
Risks that could change the story fast
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Inflation re-accelerates because of energy shocks, food prices, or wage surprises → cuts delayed or reversed.
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Labour market stays strong → central banks hold.
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Geopolitical shocks (trade wars, supply disruptions) → risk premium and policy uncertainty.
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Financial instability (credit stress) could force faster cuts in some cases — but that’s conditional.
Practical, human advice (if you’re an investor or saver)
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If you’re a cash/savings person: cuts mean short-term deposit rates tend to fall. If you have a decent yield in a fixed-term product, consider whether to ladder rather than lock everything at current rates.
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If you’re a bond investor: early cuts typically push short rates down and flatten the front of the curve; long yields may fall if growth fears rise — a diversified duration approach can help.
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If you’re an equity investor: rate cuts can support risk assets, but breadth matters — earlier rallies in 2024–25 were concentrated in a few sectors. Look for companies with durable cashflows, not just rate sensitivity.
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Hedge with cash or options if you expect volatility — don’t assume cuts are guaranteed or that markets will only go up.
Bottom line
Central banks in late-2025 were leaning toward the start or continuation of gradual easing, typically 25-bp steps, with the Fed likely to move first (late October 2025 was widely discussed), the ECB and others watching for further disinflation, and the BoE and some EMs remaining more cautious. But the path is highly conditional on upcoming inflation and labour-market readings — so expect patience and small steps rather than quick, large cuts.
If you like, I can:
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pull the current CME FedWatch probabilities and show the exact market-implied odds for the October and December 2025 meetings; or
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make a short, customized checklist of 3-5 data releases to watch over the next 6 weeks for whichever central bank you care about (Fed / ECB / RBI).
1. Why rate cuts feel automatically “bullish” to stock markets Markets are wired to love lower interest rates for three fundamental reasons: 1. Borrowing becomes cheaper Companies can: Refinance debt at lower cost Invest more cheaply Expand with less financial stress Lower interest expense = higherRead more
1. Why rate cuts feel automatically “bullish” to stock markets
Markets are wired to love lower interest rates for three fundamental reasons:
1. Borrowing becomes cheaper
Companies can:
Lower interest expense = higher future profits (at least on paper).
2. Valuations mathematically rise
Stocks are valued by discounting future cash flows. When:
→ The discount rate falls
→ The present value of future earnings rises
This alone can push stock prices higher even without earnings growth.
3. Investors rotate out of “safe” assets
When:
Bonds yield less
Fixed deposits yield less
Money market returns fall
Investors naturally take more risk and move into:
Equities
High-yield debt
Growth stocks
This is called the “risk-on” effect.
So at a mechanical level:
Lower rates = higher stock prices.
That is why the first reaction to sudden cuts is often a rally.
2. Why “sudden” rate cuts are emotionally dangerous
Here is the part that experienced investors focus on:
Central banks do not cut suddenly for fun.
They cut suddenly when:
Growth is deteriorating faster than expected
Credit markets are tightening
Banks or large institutions are under stress
A recession risk has jumped sharply
So a sudden cut sends two messages at the same time:
“Money will be cheaper.” ✅ (bullish)
“Something serious is breaking.” ⚠️ (bearish)
Markets always struggle to decide which message matters more.
3. Two very different scenarios two very different outcomes
Everything depends on the reason behind the cuts.
Scenario 1: Rate cuts because inflation is defeated (the “clean” case)
This is the dream scenario for stock investors.
What it looks like:
Inflation trending steadily toward target
Economy slowing but not collapsing
No major banking or credit crisis
Unemployment rising slowly, not spiking
What happens to equities:
Stocks usually rally in a controlled, sustainable way
Growth stocks benefit strongly
Cyclical sectors (real estate, autos, infra) recover
Volatility falls over time
Emotionally, the market says:
This is how long bull markets are born.
⚠️ Scenario 2: Rate cuts because a recession or crisis has started (the “panic” case)
This is the dangerous version and far more common historically.
What it looks like:
Credit markets freezing
Bank failures or hidden balance-sheet stress
Sudden spike in unemployment
Corporate defaults rising
Consumer demand collapsing
Here, rate cuts are reactive, not proactive.
What happens to equities:
Stocks often:
Why?
Lower rates cannot instantly fix:
Job losses
Corporate bankruptcies
Broken confidence
The first rate cut feels like rescue.
Then reality hits earnings.
This pattern is exactly what happened:
In 2001 after the tech bubble burst
In 2008 during the financial crisis
In early 2020 during COVID
Each time:
First rally → Then deep crash → Then real recovery much later
4. How different types of stocks react to sudden cuts
Not all stocks respond the same way.
Growth & tech stocks
Usually jump the fastest
Their valuations depend heavily on future earnings
Lower discount rates = big price impact
But they also crash hardest if earnings collapse later
Banks & financials
Mixed reaction
Lower rates:
If cuts signal financial stress, bank stocks often fall despite easier money
Real estate & infrastructure
Benefit strongly if:
But get crushed if:
Defensive sectors (FMCG, healthcare, utilities)
Often outperform during “panic cut” cycles
Investors seek earnings stability over growth
5. The emotional trap retail investors fall into
This happens almost every cycle:
Central bank suddenly cuts
Headlines scream
“Rate cuts are bullish for stocks!”
Retail investors rush in at market highs
Earnings downgrades appear 2–3 quarters later
Stocks fall slowly and painfully
Investors feel confused
“Rates were cut why is my portfolio red?”
Because:
Markets must first digest the pain before benefiting from the medicine.
6. What usually matters more than the cut itself
Traders obsess over:
25 bps vs 50 bps cuts
But long-term investors should watch:
Credit spreads (are loans getting riskier?)
Corporate default rates
Employment trends
Consumer spending
Bank lending growth
If:
Credit is flowing
Jobs are stable
Defaults are contained
Then rate cuts are truly bullish.
If:
Credit is freezing
Layoffs are accelerating
Defaults are rising
Then rate cuts are damage control, not stimulus.
7. How markets usually behave over the full cycle
Historically, full rate-cut cycles often follow this emotional pattern:
Euphoria Phase
Reality Phase
Fear Phase
Stabilization Phase
True Bull Market
Most people make money only in Phase 5.
Most people lose money by rushing in during Phase 1.
8. So what would happen now if cuts came suddenly?
In today’s environment, a sudden cut would likely cause:
Short term (weeks to months):
Sharp rally in
Massive FOMO-driven buying
Medium term (quarters):
Depends entirely on the economic data
If:
→ Rally extends
If:
→ Market rolls over into correction or bear phase
9. The clean truth, without hype
Here is the most honest way to summarize it:
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- Lower rates are fuel.
See lessSudden rate cuts make stocks jump first, think later. The end result is either a powerful multi-year rally or a painful fake-out depending entirely on whether the cuts are curing inflation or trying to rescue a collapsing economy.
But if the engine (earnings + demand) is broken, fuel alone cannot make the car run.