Rate hikes by year-end

• RBA: 40 bps (97% probability of rate hike at the next meeting)

2027: 58 bps

• BoE: 38 bps (65% probability of rate hike at the next meeting)

2027: 103 bps

• ECB: 35 bps (57% probability of no change at the next meeting)

2027: 83 bps

• BoC: 34 bps (58% probability of rate hike at the next meeting)

2027: 121 bps

• Fed: 33 bps (57% probability of rate hike at the next meeting)

2027: 73 bps

• RBNZ: 33 bps (60% probability of rate hike at the next meeting)

2027: 103 bps

• BoJ: 22 bps (65% probability of no change at the next meeting)

2027: 92 bps

• SNB: 11 bps (91% probability of no change at the next meeting)

2027: 71 bps

• Last week's market pricing here. The 2027 pricing indicates the total amount of tigthening expected by the end of 2027, not how much is expected in 2027 alone.

The most notable shifts this week were seen on the Fed and BoE side.

The Fed hiked interest rates by 25 bps as widely expected in an unanimous decision. Moreover, the part saying that inflation remained elevated in part reflecting supply shocks was removed. The SEP was showed an upward revision for growth and inflation and downward revision for unemployment.

The most important thing was the dot plot where the Fed projected just one more rate hike in 2026, with rates staying higher throughout 2027 before rate cuts in 2028. That was more dovish compared to market's pricing which saw one more rate hike in 2026 and two more in 2027. I think this shows that the Fed has low appetite for an extended tightening cycle.  Fed Chair Warsh mostly repeated his Jackson Hole speech but he was still seen as being more hawkish. I'm not sure why.

Anyway, the market brought forward rate hike expectations for October, with the probability rising to 57%. I guess that's because Warsh mentioned that they want to see a timelier return to the 2% target.

Turning to the BoE, the central bank kept the Bank Rate unchanged as widely expected with a 6-3 vote split (as expected). We saw a slightly dovish repricing though because the central bank reduced the pace of QT by more than the market had expected and paused sales of long-dated gilts for six months following the recent surge in long-term gilt yields.

The BoE has also ​warned that interest rates might have to go up if the Iran war drags on. All in all, it was a tad dovish, especially considering the aggressive tightening that was priced by the market. 

Looking ahead, watch carefully the situation in the Middle East as $100 oil, rate hikes and elevated bond yields might put more pressure on Trump to end the war. We might be already entering a de-escalation phase as Trump called a meeting with Gulf leaders on Tuesday on the sidelines of the UN General Assembly in New York to discuss the next steps in the war with Iran. Notably, the Iranian delegation will be allowed to participate. A de-escalation would send oil prices lower, easing inflation and rate hikes concerns.

Economic data will be another key driver. When positioning and market expectations become stretched, even a modest shift in the data can trigger a significant reversal. If the US data starts surprising to the downside, expectations for aggressive rate hikes will likely be reduced.

This article was written by Giuseppe Dellamotta at investinglive.com.

Source: Investing Live - Central Bank