Across the world, major economies are now shifting into monetary easing mode. Russia has cut interest rates despite high inflation. India has delivered its largest rate cut since the pandemic. China has injected massive liquidity into its banking system to fend off a financial squeeze. Each move is different in detail, but the overall pattern is clear: policymakers are acting to stimulate their economies as trade tensions, war costs, and weakening global demand begin to weigh on growth.
As these countries pivot toward looser financial conditions, all eyes are on the U.S. Federal Reserve. With inflation cooling and the labor market showing signs of stress, many are asking whether the Fed will soon be forced to join the trend.
Russia Surprises Markets with a Rate Cut Despite Soaring Prices
In a move that caught many economists off guard, the Bank of Russia lowered its key interest rate from 21 percent to 20 percent. It was the country’s first rate cut since the end of 2022. This came even though inflation remains far above the central bank’s official target. In April, consumer prices were still rising at a rate of 10.2 percent, well above the goal of 4 percent.
The bank said in a statement that it believes the economy is starting to move toward a more “balanced” path after a period of rapid, war-fueled growth. Russia’s economy expanded by 4.3 percent in 2024, largely because of a surge in defense production. Factories were ramped up to build weapons and equipment for the war in Ukraine, creating an artificial boom in demand.
But now, that growth is expected to slow. The European Bank for Reconstruction and Development recently predicted Russia’s economy would grow by just 1.5 percent this year and next. According to the central bank, “The impact of tight monetary conditions on demand is becoming increasingly evident in decreasing inflationary pressures.” In other words, earlier interest rate hikes are finally working to cool the economy.
Still, the Bank of Russia cautioned that any further easing will be limited. It said, “The Bank of Russia will maintain monetary conditions as tight as necessary to return inflation to the target in 2026.” It also warned that external risks remain. Higher U.S. tariffs could reduce demand for Russian oil, weaken the ruble, and raise the cost of imported goods. “A further decrease in the growth rate of the global economy and oil prices in case of escalating trade tensions may have pro-inflationary effects through the ruble exchange rate dynamics,” the bank stated.
Economists at Capital Economics said the cut came earlier than expected but predicted that more are likely. They now expect the key rate to fall to 17 percent by the end of this year and possibly to 12 percent by the end of 2026. But they also noted that because of the war, “interest rates will need to stay in restrictive territory.”
India Delivers a Shock Cut to Boost Growth
India’s central bank also made a surprising move. On June 6, the Reserve Bank of India (RBI) announced a 50-basis-point cut to its benchmark repo rate, lowering it from 6.00 percent to 5.50 percent. This was double the size of the rate cut most economists had expected, and it marked the biggest cut since March 2020, during the height of the COVID-19 pandemic.
RBI Governor Sanjay Malhotra explained the reasoning behind the decision, saying, “Growth, on the other hand, remains lower than our aspirations amidst a challenging global environment and heightened uncertainty.” Inflation in India has cooled significantly over the past six months, giving the bank room to act. The RBI lowered its inflation forecast for the year to 3.7 percent, down from 4.0 percent previously.
At the same time, the RBI reduced the cash reserve ratio, which injects more liquidity into the banking system and encourages lending. Stock markets rose sharply after the announcement, and bond yields briefly dropped. Malhotra said the central bank had moved to “frontload monetary easing” in order to give growth a boost while it still could.
However, the central bank also made a sharp shift in its policy stance. After months of calling its approach “accommodative,” the RBI now says it is moving to a “neutral” position. Some analysts saw this as a sign that the easing cycle may be near its end. Others, including economists at OCBC and Nomura, believe more cuts are still possible by the end of the year.
There is also an international angle to India’s decision. President Trump’s tariffs are creating uncertainty for Indian exports, especially steel and aluminum. India has been negotiating with the U.S. in hopes of securing a trade deal to avoid a 26 percent tariff. Malhotra acknowledged that these “headwinds” are affecting trade, though he also pointed to positive developments such as a new free trade agreement with the U.K. and progress in other negotiations.
“Spillovers from prolonged geopolitical tensions, and global trade and weather uncertainties, pose downside risks to growth,” Malhotra said. While he left the door open to more action, he also noted that the central bank may be running out of room. “Monetary policy has very limited space to support growth,” he said.
China Injects $139 Billion to Avert Financial Squeeze
While China has not cut interest rates directly, its central bank made a major move to ease financial conditions. On June 6, the People’s Bank of China (PBOC) announced it was injecting nearly $139 billion into the financial system using reverse repurchase agreements. This tool allows the central bank to temporarily increase liquidity by lending money to banks.
The timing of the announcement was unusual. Instead of releasing the details at the end of the month, as it usually does, the PBOC moved early. Analysts believe this was a preemptive move to prevent a cash crunch in late June, when banks face a record-high amount of maturing debt.
According to analysts at Caitong Securities, “The move acts as a hedge against a record-high amount of maturing certificates of deposit.” They also noted that it would “ease pressure on large banks by effectively reducing their liability costs.”
More than 4 trillion yuan in bank-issued debt is due to be repaid in June, and another 1.2 trillion yuan in reverse repos is also maturing. That’s why many experts think this move may be just the beginning. Some believe the PBOC will also cut reserve requirements later this year, or possibly end a pause on bond purchases to lower borrowing costs for the government.
The PBOC appears to be trying to align more closely with fiscal policy. By supporting banks and encouraging them to buy more government bonds, the central bank hopes to lower public borrowing costs and support economic growth.
With a new round of trade tension rising between China and the U.S., some fear that more aggressive easing could soon follow. The China Securities Journal reported that the PBOC may announce further measures later this month at the Lujiazui Forum in Shanghai. There, central bank governor Pan Gongsheng is expected to deliver a major speech.
Could the U.S. Be Next?
So far, the Federal Reserve has kept its target interest rate between 4.25 and 4.5 percent, citing the risk that President Trump’s tariffs might push inflation higher. But inflation data tells a different story.
In May, consumer prices rose only 2.4 percent compared to a year earlier. Core inflation, excluding food and energy, has dropped to a four-year low of 2.8 percent. The Fed’s preferred inflation measure is currently rising at just 1.3 percent on an annualized basis over the past three months. In other words, the inflation threat appears to be easing.
At the same time, the labor market is weakening. The unemployment rate has risen steadily since January. Jobless claims have jumped in recent weeks, and private payroll growth may be much lower than it appears. ADP, a payroll processor, reported just 37,000 new private sector jobs in May. Economists at RBC noted that this pattern of downward revisions is often seen before a recession.
The tariffs are also beginning to hurt purchasing power. While import prices have not spiked, economists suspect that hidden costs such as shipping surcharges are affecting consumers. Wages are no longer rising as fast as they were during the pandemic, and service inflation is finally falling, thanks in part to cheaper airfare and more stable housing costs.
Economist Omair Sharif said, “A lot of what we expected in shelter has come to fruition.” That means one of the main drivers of inflation is no longer adding pressure.
With rates still about a point above what many consider “neutral,” the Fed may soon find itself under pressure to ease. While there is no immediate need to cut rates at the next meeting, conditions are shifting. If inflation stays low and the job market keeps softening, the U.S. may find itself joining the same wave already underway in Russia, India, and China.
The rest of the world is not waiting.
FAM Editor: Trump is putting more and more pressure on the Fed to ease interest rates. He recently stated that each 1% cut saves $300 Billion/ year in debt service obligations. He has a point there…
