Central Banks Reassess Interest Rate Expectations Amid Trade War Tensions

Central banks' interest rate expectations have shifted following this week's events. According to investingLive, the Reserve Bank of New Zealand (RBNZ) now predicts a 55bps rate hike by year-end, with a 99% probability of a rate increase at their next meeting.

The European Central Bank (ECB) also sees a 41bps rate hike, with a 98% chance of an increase. In contrast, the Bank of Japan (BoJ) forecasts a 37bps rate rise, but with only a 67% probability.

Other central banks have also updated their interest rate expectations, including the Reserve Bank of Australia (RBA), which predicts a 27bps hike, and the Bank of England (BoE), which sees no change. The Federal Reserve (Fed) expects a 26bps rate increase, while the Bank of Canada (BoC) anticipates no action.

Last week's market pricing showed relatively stable expectations, but this week's data has led to significant changes in some cases. The RBA's update was driven by Australia's higher-than-expected monthly CPI report, which saw a 3.6% increase, exceeding forecasts of 3.5%. This hawkish repricing may have implications for investors.

Another notable development is the Bank of Canada's dovish repricing following US-Canada trade talks breaking down and retaliatory tariffs being imposed. The BoC had warned that a trade war would negatively impact economic growth and lead to a less hawkish stance.