News of the week summary - 07/12/2025
OECD sees rate cutting cycles ending in 2025 and improved macro outlook
The OECD expects major economies to stop cutting interest rates by the end of next year, signalling that central banks have limited room to loosen monetary policy further. Its new global outlook shows that although inflation has fallen sharply from its peaks, underlying pressures and structural constraints mean interest rates are unlikely to return to the very low levels seen before the pandemic.
The OECD forecasts that the United States Federal Reserve will cut rates only two more times before the end of 2026, after which policy will stay at about 3.25 to 3.5 percent through 2027. That level would be well above the near zero rates that prevailed in the 2010s. The Federal Reserve faces a difficult balance. Tariffs are adding inflationary pressure while the labour market is showing signs of cooling. This creates an environment in which small cuts may be justified, but a return to cheap money is unlikely.
In the eurozone and Canada, the OECD expects no further rate cuts. In contrast, it believes Japan will continue tightening policy steadily because inflation there is stabilising around two percent, which is the Bank of Japan’s target. In the United Kingdom, the organisation expects rate cuts by the Bank of England to stop in early 2026, with Australia ending its cycle in the second half of that year.
A key concept in the report is the neutral real interest rate. This is the inflation adjusted rate at which monetary policy neither stimulates nor restrains the economy. The OECD says that in many advanced economies, real policy rates are already close to this neutral range, and all are expected to be within it by 2027. That supports the case for a pause in easing. Higher public debt levels also mean that keeping rates too low for too long could reignite inflation.
Despite the drag from tariffs, the OECD argues the global economy is performing better than feared. It forecasts world GDP growth of 3.2 percent in 2025, followed by a modest slowdown to 2.9 percent in 2026 and a rise to 3.1 percent in 2027. These figures are broadly consistent with the International Monetary Fund. One reason for the resilience is strong investment linked to artificial intelligence technologies. This has boosted industrial production in the United States and parts of Asia and partly offset the negative effects of trade restrictions.
The United States economy is now expected to grow 2 percent in 2025, slightly better than earlier forecasts. Growth will become less dependent on AI driven activity over the year. The OECD still expects the economy to slow as tariffs take effect, but less sharply than previously anticipated, with GDP rising 1.7 percent in 2026.
The organisation also upgraded its 2025 forecasts for the eurozone and Japan, now expecting growth of 1.3 percent in each. It raised its projections for emerging economies such as India and Brazil. The United Kingdom is set to perform slightly better in 2026 than the OECD forecast earlier, with growth easing to 1.2 percent rather than 1 percent.
Europe Moves to End Dependence on Russian Gas as Its Energy Map Is Redrawn
The European Union has agreed to impose a full ban on Russian gas imports by autumn 2027, marking a decisive step in Europe’s long effort to unwind decades of energy dependence on Moscow. The decision includes earlier deadlines for phasing out liquefied natural gas and short term supply contracts, as well as a request for the European Commission to propose a similar ban on Russian oil imports from 2027. Although Russian oil is already restricted, exemptions for Hungary and Slovakia have remained in place due to their reliance on pipeline crude.
Before Russia’s invasion of Ukraine in 2022, about 40 percent of the EU’s natural gas came from Russia. Gas was a central pillar of the European energy system, used for heating, electricity generation and industrial processes. Moscow’s strategy of cutting supplies in late 2021 and early 2022 exposed the risks of this dependence. Supply shortages pushed European energy prices sharply higher, raising costs for households and manufacturers and contributing to a surge in inflation. These shocks motivated the EU to rapidly diversify away from Russian energy. Europe has since replaced much of its Russian supply through increased imports from Norway and the United States, together with a sharp scaling up of renewable energy production.
The new ban reflects both geopolitical and macroeconomic considerations. Energy security, which means reliable access to affordable energy, became a priority once Russia demonstrated its willingness to weaponise gas flows. By committing to a full ban, the EU aims to prevent future vulnerabilities while reducing revenue that Russia can use to support its war effort. Russia’s fossil fuel earnings have already fallen to their lowest level since the war began, according to independent estimates. Cutting off gas revenues further weakens a key source of funding for the Kremlin.
Yet the path to a ban required compromise. Hungary and Slovakia, which still receive Russian oil and remain heavily dependent on Russian energy infrastructure, opposed a rapid phaseout. The final agreement includes the possibility of extending the deadline slightly to November 2027 if countries struggle to build adequate gas storage. It also allows temporary exemptions in the event of severe supply shocks, when a member state may declare a state of emergency.
Traders and regulators will face practical challenges in enforcing the ban. Imported gas molecules cannot easily be traced back to their origin, so customs authorities will require certificates of origin to verify compliance. Companies that fail to meet the rules could face heavy fines, reflecting the EU’s determination to prevent circumvention through intermediaries.
From a macro perspective, the ban accelerates Europe’s ongoing shift toward a more diversified and resilient energy system. In the short term, transition costs remain. Building new infrastructure, securing alternative supplies and adjusting industrial processes take time and investment. Over the longer term, however, reducing exposure to Russian energy may help stabilise prices, strengthen geopolitical autonomy and reinforce the credibility of Europe’s climate strategy, since renewables now account for a growing share of the continent’s energy mix.
The ban also weakens a leverage point Russia long held over Europe. With Moscow exporting more of its oil and gas to Asian buyers, particularly China, global energy flows are being reconfigured along political lines. Europe’s decision to cut ties by 2027 formalises that shift and signals that the pre war model of deep energy integration with Russia will not return.
Europe moves to end Russian gas imports by 2027
The European Union has agreed to impose a full ban on Russian gas imports by autumn 2027, marking a decisive step in Europe’s long effort to unwind decades of energy dependence on Moscow. The decision includes earlier deadlines for phasing out liquefied natural gas and short term supply contracts, as well as a request for the European Commission to propose a similar ban on Russian oil imports from 2027. Although Russian oil is already restricted, exemptions for Hungary and Slovakia have remained in place due to their reliance on pipeline crude.
Before Russia’s invasion of Ukraine in 2022, about 40 percent of the EU’s natural gas came from Russia. Gas was a central pillar of the European energy system, used for heating, electricity generation and industrial processes. Moscow’s strategy of cutting supplies in late 2021 and early 2022 exposed the risks of this dependence. Supply shortages pushed European energy prices sharply higher, raising costs for households and manufacturers and contributing to a surge in inflation. These shocks motivated the EU to rapidly diversify away from Russian energy. Europe has since replaced much of its Russian supply through increased imports from Norway and the United States, together with a sharp scaling up of renewable energy production.
The new ban reflects both geopolitical and macroeconomic considerations. Energy security, which means reliable access to affordable energy, became a priority once Russia demonstrated its willingness to weaponise gas flows. By committing to a full ban, the EU aims to prevent future vulnerabilities while reducing revenue that Russia can use to support its war effort. Russia’s fossil fuel earnings have already fallen to their lowest level since the war began, according to independent estimates. Cutting off gas revenues further weakens a key source of funding for the Kremlin.
Yet the path to a ban required compromise. Hungary and Slovakia, which still receive Russian oil and remain heavily dependent on Russian energy infrastructure, opposed a rapid phaseout. The final agreement includes the possibility of extending the deadline slightly to November 2027 if countries struggle to build adequate gas storage. It also allows temporary exemptions in the event of severe supply shocks, when a member state may declare a state of emergency.
Traders and regulators will face practical challenges in enforcing the ban. Imported gas molecules cannot easily be traced back to their origin, so customs authorities will require certificates of origin to verify compliance.
From a macro perspective, the ban accelerates Europe’s ongoing shift toward a more diversified and resilient energy system. In the short term, transition costs remain. Building new infrastructure, securing alternative supplies and adjusting industrial processes take time and investment. Over the longer term, however, reducing exposure to Russian energy may help stabilise prices, strengthen geopolitical autonomy and reinforce the credibility of Europe’s climate strategy, since renewables now account for a growing share of the continent’s energy mix. The ban also weakens a leverage point Russia long held over Europe. With Moscow exporting more of its oil and gas to Asian buyers, particularly China and India, global energy flows are being reconfigured along political lines.
France and China confront rising trade tensions
President Emmanuel Macron’s meeting with Xi Jinping in Beijing highlighted Europe’s growing anxiety over its economic relationship with China and the broader risk that rising protectionism could fracture the global system that has shaped international trade for decades. Macron warned that the international order, built on rules and cooperation, is showing signs of disintegration. Such an order supports predictable trade flows, stable investment and coordinated policymaking. When it weakens, countries often turn to unilateral measures like tariffs or export restrictions, which can disrupt supply chains and reduce global growth.
Europe is increasingly uneasy about China’s large and persistent trade surpluses with the region. A trade imbalance becomes problematic when one side consistently exports far more than it imports. In Europe’s view, this pattern reflects structural advantages enjoyed by Chinese industry, supported by state subsidies and policies that favor domestic producers. If sustained, such imbalances can erode European manufacturing competitiveness, fuel political backlash and pressure governments to respond with protective measures. Macron warned that without adjustments, the current path could trigger a trade war, which is a cycle of retaliatory tariffs and barriers that raises costs across the global economy.
China has also tightened export controls on rare earth minerals. These materials are essential for manufacturing electric vehicles, advanced electronics and defense equipment. Because China dominates global supply, its controls give Beijing considerable leverage. For Europe, this concentration represents a strategic vulnerability. Any disruption could slow industrial production and hinder the transition to clean energy technologies.
Against this backdrop, both leaders emphasized the need for multilateralism, the principle that countries should coordinate through international institutions rather than act alone. Macron urged China to increase investment in Europe by 2030 to help reduce economic asymmetries. Xi signaled openness to deeper cooperation in industries such as aerospace, nuclear energy and artificial intelligence. These are sectors tied to long term productivity growth, and mutual investment could soften tensions if implemented meaningfully.
Still, China continues to prioritize industrial self reliance, meaning it seeks to produce more advanced technologies domestically to reduce dependence on foreign suppliers. This goal sometimes conflicts with Europe’s desire for greater market access and fairer competition. Xi’s remarks suggested China sees opportunities for French firms in its upcoming five year plan, but also that foreign participation must align with China’s strategic priorities.
The backdrop to Macron’s trip also includes Europe’s increasing willingness to scrutinize Chinese companies operating within its borders. France is awaiting a ruling on a proposed temporary ban on the fast growing Chinese retailer Shein after regulators found illegal products on its platform. This reflects a broader European trend toward tighter regulation of foreign firms, especially in cases involving safety, environmental standards or unfair competition.
Indian growth surges and inflation falls
India’s central bank lowered its benchmark interest rate by a quarter of a percentage point to 5.25 percent, marking the latest step in a broader cycle of monetary easing that has now totaled 1.25 percentage points since last year. The move reflects an unusual combination of strong economic growth and sharply reduced inflation, a dynamic often described as a Goldilocks period. In economic language, a Goldilocks environment refers to conditions that are neither too hot nor too cold: growth is solid while inflation remains low, giving policymakers room to act without risking overheating.
Recent data shows India’s economy expanding at an annual rate of 8.2 percent in the September quarter. This performance has surprised economists who expected US tariffs of 50 percent on many Indian exports to slow momentum. Tariffs act as taxes on traded goods and usually reduce demand for those goods abroad. Yet India’s domestic activity has been strong enough to offset this drag, which suggests that household spending, investment and public sector demand have remained robust.
Inflation has fallen dramatically as well, from more than 6 percent last year to close to zero. For a central bank, lower inflation provides scope to cut interest rates because the risk of rising prices is low. Interest rates influence borrowing costs throughout the economy. When the central bank cuts rates, it becomes cheaper for households and firms to borrow, which tends to support spending and investment. The Reserve Bank of India signaled that although growth may moderate somewhat, current conditions justify supporting activity while price pressures are subdued.
Financial markets reacted quickly. Indian stock indices rose modestly, since lower interest rates usually raise the appeal of equities by making borrowing cheaper for companies and by lowering the relative return on safer assets. At the same time, the rupee weakened to more than 90 per dollar, approaching record lows. Lower interest rates often reduce the attractiveness of a currency because investors earn less on interest bearing assets denominated in that currency.
The rupee has been Asia’s weakest performing currency this year. The central bank emphasized that it does not target a specific exchange rate and will let market forces determine its value while intervening only to limit excessive volatility. In practice, this means the RBI will smooth sharp swings rather than defend a particular level.
With growth forecast to remain above 7 percent for the full fiscal year and inflation still subdued, India appears set to continue navigating a rare moment when macroeconomic conditions are aligned in its favor, even as external pressures such as tariffs and a weakening currency remain in the background.
Eurozone inflation ticks up unexpectedly
Eurozone inflation rose to 2.2 percent in November, slightly above economists’ expectations and above the European Central Bank’s two percent target for the third consecutive month. The increase was driven mainly by services inflation, which reflects domestic price pressures. Services inflation reached 3.5 percent, its highest level since April, and has stayed above the ECB’s target for more than three years. Core inflation, which excludes food and energy, remained steady at 2.4 percent, suggesting that underlying price pressures are easing only slowly.
Germany, the eurozone’s largest economy, also saw a stronger than expected rise in inflation. Its headline rate increased to 2.6 percent in November. Because Germany has significant weight in the overall eurozone index, upward surprises there typically push the aggregate figure higher.
The latest inflation numbers highlight a key macroeconomic challenge. While overall inflation has fallen sharply from its post pandemic peaks, the final stretch back to target is proving uneven. Services tend to adjust more slowly because their prices reflect labour costs, rents and other domestic inputs that do not move as quickly as global energy or food prices. Persistent services inflation can signal a tight labour market or strong wage growth, both of which can delay the return to stable inflation.
Unemployment in the eurozone unexpectedly rose to 6.4 percent in October. Although still low by historical standards, the slight increase suggests that labour market conditions may be loosening. A softer labour market would help reduce wage driven inflation over time.
The ECB is expected to keep interest rates unchanged at two percent at its December meeting. The latest data give policymakers little reason to begin cutting rates soon. Market pricing still suggests only around a 30 percent probability of a rate cut by June next year. Economists note that although inflation is on a downward trend, the pace of decline remains fragile. The ECB will want clearer evidence that inflation is firmly on track to stay at target before lowering borrowing costs.
Financial markets reacted only mildly. The euro edged down by 0.1 percent against the dollar. The modest move reflects investors’ view that the data support the ECB’s current wait and see approach rather than indicating a major shift in policy direction.