Central Banks Tread Cautiously Amid Rising Rate Hike Expectations

The central bank bonanza returns to markets in the final week of July, with key policy decisions from major central banks. The Federal Reserve's FOMC meeting on July 29 is expected to keep interest rates unchanged, but traders are pricing in a higher probability of rate hikes by year-end.

Oil prices have surged due to ongoing tensions between the US and Iran, bolstering inflation expectations and leading to a ~41 bps increase in expected rate hikes for both the Fed and BOE. However, central banks will likely maintain their cautious tone, emphasizing flexibility and optionality amidst the Middle East crisis.

The Bank of England's policy decision on July 30 is also expected to keep rates unchanged at 3.75%, but attention will be on the bank rate vote and commentary after the decision. The BOE has been under pressure to act due to stubborn core inflation, with market pricing indicating a ~41 bps increase in rate hikes by year-end.

The Bank of Japan's policy meeting on July 31 is also expected to keep rates steady, despite growing concerns about inflation and the weakening economy. The BOJ will have to balance its monetary policy with the potential for further yen weakness and rising fiscal risks.