Major central banks across the Group of 10 are tightening policy, led by the Federal Reserve's Wednesday rate increase, as a Red Sea oil shock threatens to keep prices elevated. Several G10 banks have raised rates this year or signaled they are ready to, even as economists warn markets may be overpricing how aggressive that path will get.
The Federal Reserve raised interest rates and flagged more hikes on Wednesday, a move that eased concerns about the central bank's independence as President Donald Trump presses for lower borrowing costs. Policymakers project one more rate hike in 2026 and a hold in 2027, but traders are pricing in more than one increase this year and roughly three moves by the end of 2027.
Oil shock complicates the outlook
Economists say markets may be overpricing future increases amid fears an oil shock could worsen after Houthi forces seized a strategic stretch of Red Sea coastline, a move seen as signaling a more assertive stance by Iran-backed militia. The shock is already shaping policy elsewhere: the European Central Bank raised rates for the second time this year and struck a hawkish tone as energy prices rise, while Bank of England Governor Andrew Bailey warned that prolonged conflict in the Middle East may require tighter policy.
Markets expect the ECB to deliver at least one further hike by year-end and see its deposit rate above 3% in 2027, though some economists think the energy shock will eventually weigh on growth and help curb inflation pressures. The Bank of England, meanwhile, kept its rate steady at 3.75% on Thursday, with three rate setters voting for a hike.
Divergence across the G10
The Reserve Bank of Australia has hiked rates three times this year to 4.35%, undoing all of last year's cuts, and its deputy governor said policymakers would debate another hike at this month's meeting. The Bank of Japan raised its rate to a 31-year high of 1.25% on Friday and warned of broadening price pressures, though two dissenters and cautious guidance left investors uncertain about the pace ahead.
Not every central bank is moving at the same speed. Norway's Norges Bank held its rate at 4.25% in August as inflation softened, and the Swiss National Bank is expected to hold its interest rate at 0% when it meets on September 24. Sweden's Riksbank, in the most dovish camp, is expected to keep its rate at 1.75% after August inflation figures came in below expectations.
Canada and New Zealand hold steady, but not by much
The Bank of Canada left rates on hold earlier this month, but Governor Tiff Macklem said it could raise rates multiple times if inflation remains elevated, a shift from his earlier view that risks to inflation and growth were balanced. A cooling labor market and trade tensions with the United States have since clouded the outlook, though markets still price in another hike by year-end.
Meanwhile, the Reserve Bank of New Zealand hiked rates for a second consecutive meeting to 2.75%, even as it signaled further tightening would likely be measured given growing risks to the outlook.
Source: Investing.com
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