Central Banks Set for Key Decisions Amid Ongoing Global Uncertainty

The week ahead is set to be significant for central banks and economies worldwide. The Federal Reserve is expected to leave interest rates unchanged at 3.50-3.75%, with a 30-35% chance of a hike. A softer June CPI report, weaker nonfarm payrolls, and a BEA methodology change that will mechanically lower core inflation by about 0.2ppts have given the Committee room to wait.

Policymakers are cautious not to respond too quickly to what may be a temporary shock, particularly with underlying inflation remaining above target and pressure extending beyond energy prices. Higher memory chip costs are beginning to feed through to consumer goods, while tariffs could return to the fore when current Section 122 universal measures expire this week.

The Bank of Canada is also expected to keep rates unchanged at 2.25%, acknowledging the high level of uncertainty surrounding the Middle East situation. The upcoming BoC minutes will likely reiterate their nimble approach and acknowledge that further policy action may be needed if inflation remains persistent.