Global Central Banks Gear Up for Rate Hikes

The Federal Reserve is likely to hike interest rates in September, according to recent views. Chair Kevin Warsh's Jackson Hole speech suggested he may take action due to inflation running too hot for too long in an environment of full employment and loose financial conditions.

This shift in the Fed's position means a rate hike on September 16 is now more probable than holding rates steady, unless data justifies a pause. Macro views suggest tepid job creation, on-trend growth, and cooling inflation, which could make this a risk management move rather than the start of a series of hikes.

The European Central Bank also seems poised to hike rates at its September meeting. The eurozone economy has shown resilience to the war in the Middle East, partly due to good luck and Asian competitors being hit harder by the closure of the Strait of Hormuz. Headline inflation has continued to edge higher, but core and services inflation measures provide no reason to panic.

The Bank of England's bar for a rate hike remains high. Markets price three hikes by next summer, but officials have drawn a line in the sand at 4% inflation. Inflation is forecast to briefly peak at 3.5% next winter, which is below its previous peak. Two rate cuts are expected in 2027 unless there's a material loosening of fiscal policy.

The Bank of Japan will likely hike rates by 25bp in September, taking the policy rate to 1.25%. Most policymakers see the neutral policy rate close to 2.00% and expect inflation to sustainably exceed 2% over their policy horizon. The question is whether this represents an acceleration or merely some quid pro quo for US Treasury support.