The Commonwealth Bank of Australia’s (CBA) economics team has flagged that the global cycle of interest rate cuts is nearing its end, while growing political pressure on the US Federal Reserve poses a fresh challenge to global markets.
“Except for Japan, policy interest rates in advanced economies will have been cut from very restrictive to close to ‘neutral’ by early 2026,” the bank said. “The interest rate cut cycle is close to its endpoint in our view.”
The major bank noted that despite several years of restrictive monetary policy, inflation remains above target in several major economies including the US and the UK.
“There is a risk that monetary policy easing stops sooner than our forecasts. But if labour markets retrench, central banks will continue to cut their policy interest rates. Labour markets have softened materially in the US and Canada.”
With the US labour market showing signs of strain and payroll data suggesting it may be close to “stall speed”, Federal Reserve chair Jerome Powell signalled at Jackson Hole that he would support rate cuts in response to labour market weakness, even as inflation remains elevated.
CBA expects further reductions to the US rate in coming months, predicting four 25 basis point cuts in September, October, December and March 2026, with the possibility of a larger 50 basis point move before year-end.
However, the big bank cautioned that central banks may be forced to pause sooner than expected if inflation fails to ease as forecast.
Meanwhile, political dynamics in Washington are creating new risks, with President Donald Trump ramping up attempts to influence the composition of the Federal Open Market Committee, calling for sharper reductions in interest rates.
“The growing threats to the independence of the Federal Reserve [by] President Trump are growing,” CBA said.
It added that if the Fed’s inflation-fighting credibility is perceived as compromised, “long term government bond yields and mortgage interest rates could spike and slow the economy”.
Additionally, the report noted that tariffs have contributed to higher core inflation in the US, though so far there has been limited evidence of a broader acceleration in wages or corporate profit margins.
“The sharp increase in tariffs has increased core inflation modestly. So far there is limited evidence the tariff-inspired increase in inflation expectations has spilled over to an acceleration in wage growth or an expansion of corporate profit margins,” it said.
While employment growth remains soft, the major bank believes this will bear down on wage inflation over time. But risks remain, particularly from sharp curbs to immigration that could create labour shortages and push up wages and prices.
Domestically, CBA expects the Reserve Bank of Australia to deliver its next rate cut in November, lowering the cash rate to a terminal 3.35 per cent, with no further reductions anticipated thereafter.
Earlier this month, the big four bank said further easing in 2026 “remains possible” but would require deterioration in the labour market and an “unsteady transition from public sector-led growth to the private sector”.
