Rates reset across the West – December 2025

Rates reset across the West – December 2025

Back in October, I examined the emerging trend of interest rate cuts across the Western world, looking at why they were occurring and how different economies were responding. Since then, rate cuts have continued in several countries. In this update, I return to the same six economies (Australia, the U.S., the UK, Europe, Canada, and New Zealand), incorporating more recent inflation expectations and labour-market data to assess what these developments may signal for 2026.

I have tabled the cash rate movements from the Central Banks of these six Western World economies, accompanied by some brief economic observations.

Australia

Australia has cut its cash rate on three occasions between February 2025 and August 2025 from 4.35 per cent to 3.60 per cent. With the latest inflation data running at an annual rate of 3.8 per cent, Reserve Bank of Australia (RBA) Governor, Michele Bullock, will need to rethink further interest rate cuts if inflation continues to remain sticky. In November the Australian unemployment rate, which has been in a gentle uptrend from 3.5 per cent in mid-2022, was 4.3 per cent.

United States

The U.S. has cut its cash rate on six occasions from 5.50 per cent to 3.75 per cent over the 15 months to December 2025. U.S. short-term inflationary expectations remain elevated with consumer prices increasing by 3.0 per cent, whilst the unemployment rate stands at 4.4 per cent, the highest level since October 2021. That said, some of this data is lagging given the government shutdown. The market is also somewhat anxious over Jerome Powell’s successor, as Governor of the U.S. Federal Reserve, in May 2026.

 United Kingdom

The UK has cut its cash rate on five occasions from 5.25 per cent to 4.0 per cent over the 12-months to August 2025. UK inflation was running at 3.6 per cent in the year to October 2025, and while it is coming down it remains the highest rate of the G7 (US, Canada, France, Germany, Italy, Japan, the UK) economies. The UK unemployment rate sits at 5.0 per cent, the highest level since July 2021.

Europe

The Eurozone has cut its cash rate on eight occasions from 4.50 per cent to 2.15 per cent over the 12-months to June 2025. The region’s economy appears to be under stress with the annual inflation rate sitting at 2.2 per cent in November 2025, whilst the most recent unemployment rate sits at 6.3 per cent. Spain (10.4 per cent), Finland (10.0 per cent), Sweden (8.8 per cent) and France (7.6 per cent) are the stand outs amongst the more developed economies. 

Canada

Canada has also cut its cash rate on eight occasions, from 5.0 per cent to 2.25 per cent over the 18-months to December 2025. The inflation rate was 2.2 per cent in October 2025, whilst the unemployment rate at 6.5 per cent in November 2025, was down from the nine-year high of 7.1 per cent in September 2025.

New Zealand

New Zealand has cut its cash rate on eight occasions from 5.50 per cent to 2.25 per cent over the 16-months to November 2025. The annual inflation rate hit 3.0 per cent in the September 2025 Quarter, up from 2.2 per cent in the September Quarter 2024.  The unemployment rate in the September 2025 Quarter was 5.3 per cent, a five-year high.

What does it all mean?

The six economies have, over the past 15-18 months, seen an average of six interest rate cuts (ranging from 3 in Australia to 8 in the Eurozone and Canada). The average cut across these six economies has been 2.0 per cent (ranging from 3.25 in New Zealand to 0.75 per cent in Australia) from an average peak of 5.0 per cent to a current average cash rate of 3.0 per cent.  And in percentage terms, that is a 40 per cent reduction.

The impact has varied greatly. For example, Europe, Canada, New Zealand appear to be the three weaker economies with unemployment running at 6.3 per cent, 6.5 per cent and 5.3 per cent, respectively.  Europe has cut its cash rate from 4.50 per cent to 2.15 per cent, Canada has cut from 5.0 per cent to 2.25 per cent and New Zealand has cut from 5.5 per cent to 2.25 per cent. 

In contrast Australia and the U.S. have remained more resilient, supported by relatively lower unemployment but grappling with stickier inflation.

With inflation averaging around 3.0 per cent across these six economies (with a range of 3.8 per cent to 2.2 per cent), the one highlight is that we have noticed inflationary expectations have creeped up a little in recent months. 

For 2026, we expect cash rates to come down a little further in Australia (3.6 per cent), the U.S. (3.75 per cent) and the UK (4.0 per cent), with the unemployment rate continuing to trend up, and the rates of inflation declining modestly.

Read Part One here: Rates reset across the West.

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Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience.
David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.