We got the BOC and Fed yesterday, with the latter being the more heavily watched one of the two. The balance of the scales at the Fed leaned more hawkishly even as they held interest rates steady. The median dot plots now shows just one rate cut for the remainder of 2026 with Fed chair Powell also emphasising on two-sided risks to the inflation outlook.
The equities market certainly didn’t like that and Treasury yields surged higher as a result. The S&P 500 index closed down 1.4% while 2-year Treasury yields have now soared to 3.80%, its highest since August last year.
The escalating tensions in the Middle East yesterday certainly didn’t help with the backdrop for the Fed decision. That as Iran continues to cause chaos across the region while the Strait of Hormuz remains in de facto closure.
Then earlier today, we got the BOJ decision – which saw a 8-1 vote in favour of keeping the policy rate unchanged. Takata was the sole dissenter this time around, which isn’t much of a surprise given his more hawkish leanings. It’s steady as she goes for the BOJ as policymakers are sidelined awaiting the spring wage negotiations outcome and further developments in the Middle East.
Coming up later, we’ll have more key central bank decisions to deal with as the focus turns to Europe.
First up on the agenda is the SNB, which is expected to keep the policy rate at 0%. A move towards unconventional monetary policy is what the central bank wants to avoid. However, they are slowly being pushed to the limit amid deflationary pressures and a stronger Swiss franc currency.
For now, they will be sticking with FX interventions to manage the latter in hopes of trying to buy time for price pressures to rebound.
After that, we will have the BOE next with no change expected to the bank rate either. The bank rate vote will be closely watched though as it could swing around between a likely outcome of 6-3 to 7-2. Dhingra and Ramsden are the two major doves likely to keep siding with a more dovish view despite the US-Iran conflict. The additional swing vote could come from either Taylor or Breeden, but both could fall back and not break ranks this time around.
Markets are not expecting anything major with ~99% odds priced in for the bank rate to be kept at 3.75%.
And lastly, we’ll have the ECB decision to round things off this week. The conversation at the ECB has shifted quite dramatically in the past few weeks and this meeting now looks to be a bit more important.
Before this, the central bank was firmly stuck in neutral mode as stickier price pressures prevented policymakers from pursuing more rate cuts. But with the inflation outlook now heating up amid the Middle East conflict, suddenly rate hikes appear to be back on the table again. Or at least that is what markets are looking forward to by the ECB next.
As things stand, a rate hike in April is even priced at ~33% with those odds quickly rising to near ~80% by the summer.
If anything, I would expect the ECB to play things down and reaffirm that it would be too hasty to rush any decision at the moment. They want optionality, so they definitely won’t rule out needing to respond in the future. However, I wouldn’t put it past policymakers to repeat the script that we saw back in 2021-22 in trying to play this down as “transitory” again – at least for this week.
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