Central Banks Gear Up for Rate Hikes Amid Inflation Concerns

ING Think has released its latest views on major central banks, including the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan.

The publication expects a rate hike from the Federal Reserve at its September meeting. Previously, ING thought the Fed could wait out inflation, but Chair Kevin Warsh's speech suggested he is inclined to take action due to prolonged high inflation in a period of full employment.

ING thinks this shift in policy stance makes a 16 September rate hike more probable than a steady interest rate environment. However, they still view this as a risk management move rather than the start of a series of hikes.

The European Central Bank is also expected to raise rates at its September meeting, driven by an unexpectedly resilient eurozone economy and rising headline inflation.

ING views this second rate hike this year as an 'insurance' measure to strengthen credibility and preempt potential indirect effects from the current energy price shock.

The Bank of England still has a high bar for a rate hike, with markets pricing in three hikes by next summer. While some officials voted for a hike in July, most remain embedded in the 'on hold' camp.

ING forecasts inflation to briefly peak at 3.5% next winter, below the peak seen in 2022 when the Bank was cutting rates. They expect two rate cuts in 2027 unless there is a material loosening in fiscal policy from the October budget.

The Bank of Japan is expected to hike rates by 25bp in September, with most policymakers seeing the neutral policy rate close to 2% and inflation sustainably above 2%. ING's base case assumes two follow-up hikes in January and April next year.