Central banks around the world are expected to continue trimming their policy rates through the second half of 2025, Fitch Solutions has said.

In its latest report titled 'Mid-Year Update: Banking Key Themes for 2025', the UK-based research firm forecasts that major institutions like the European Central Bank (ECB), the US Federal Reserve, and the Gulf Cooperation Council (GCC) will collectively cut rates by up to 50 basis points before the year ends.

While lower interest rates may offer relief to borrowers, Fitch warns they could squeeze banks’ profits.

The impact is already being felt, especially among US and European banks, where net interest income — the money banks earn from lending — is under pressure.

“Profitability resilience will depend largely on the extent to which rate cuts reinvigorate loan demand, as well as performance in banks’ non-interest income segments,” part of the report read.

Fitch notes that banks’ ability to stay profitable will depend on whether these rate cuts spark new loan demand and how well they perform in areas beyond traditional lending.

Cedi hits GH¢12.27 against one dollar amid forex pressures

In Ghana, the Bank of Ghana has already taken bold steps, slashing its policy rate by a substantial 650 basis points since the start of the year.

Adding to the financial sector’s challenges is the ripple effect from President Donald Trump’s April 2025 tariff announcement.

Although banks weren’t directly targeted, the move triggered widespread market volatility, dragging down bank share prices across the globe.

Fitch explains that the real threat lies in the secondary effects, slower economic growth, unstable exchange rates, and shifting interest rate expectations.

These factors can erode investor confidence, dampen lending activity, and stall mergers and acquisitions.

While large US banks with strong capital buffers have weathered the initial shock, others haven’t been as fortunate. Institutions with heavy exposure to tariff-affected regions, such as HSBC’s operations in Mainland China and some Spanish lenders, saw sharper declines in their share prices immediately after the announcement.

IMF team to begin 5th review of Ghana's programme on September 29

Fitch cautions that this politically driven uncertainty makes it harder for banks to balance the benefits of monetary easing against the risks posed by new tariffs and rising geopolitical tensions.

High interest rates have also worsened structural problems in the commercial real estate (CRE) sector, particularly in office spaces.

In the US, demand for office buildings has dropped post-pandemic as remote work continues to reshape workplace habits.

Fitch reports that overdue CRE loans in the US rose to 1.6% in the first quarter of 2025 — the highest level since 2014. Smaller regional banks are feeling the strain most, given their heavy exposure to the sector.

Meanwhile, larger banks are better protected due to stronger capital positions.

Although there are early signs that US CRE prices may be stabilising, Fitch warns that the underlying demand issues won’t go away unless office attendance picks up significantly.

In Europe, banks have limited exposure to the US CRE market, but Deutsche Bank stands out as the most affected.

German banks, in particular, are grappling with CRE challenges.

By the end of 2024, CRE loans made up 9.9% of total loans, and non-performing loans in this segment had climbed to 5.9%.

SA

Watch the latest edition of BizTech below: