Central bank scanner: Rate cutting cycle ends - some banks eye rate hikes

European Central Bank (ECB): 

• Recent action (April 30): Inflation topped 3% for the first time since post-pandemic cooling in 2023. Policymakers decided to unanimously hold rates unchanged at their last meeting in April, while signaling a rate hike at their next meeting in June.

• Upcoming (June 11): The ECB is forecast to hike 25 basis points. Headline and core inflation are above the ECB’s 2% target while inflation expectations have risen. The upward pressure on prices coupled with the knowledge that the ECB was late to hike rates and stem inflation post-pandemic are shaping that decision. A second hike is expected later in the year.

Federal Reserve (Fed): 

• Recent action (April 29): No change in the policy rate in an 8-4 vote. That is the largest number of dissents since 1992. One dissent was in favor of a rate cut with the other three disagreeing with statement verbiage indicating a bias towards easing. There has been a notable shift in the hawkish direction with policymakers citing upside risks to inflation that will worsen the longer the Strait of Hormuz is closed. The lone dissenter has left the Federal Reserve Board. 

• Upcoming (June 17): No change in the policy rate is expected. Chairman Kevin Warsh will lead this first meeting since Jay Powell’s tenure lapsed – Powell has decided to stay on the board. He will cautious not to overshadow Warsh – do not expect any policy speeches or open dissent from Powell. The remaining Fed leadership will push to remove the easing bias in the statement. Warsh has made his preference to remove forward guidance from the statement and forecasts the Fed produces entirely. Change at the Fed comes in increments, not leaps and bounds - he still represents only one vote. The Fed’s favored inflation gauge has moved back above the pace it was when it was still hiking rates in 2023. We expect two rate hikes in the second half of the year.

Bank of Canada (BOC):  

• Recent action (April 29): Inflation from the Middle East conflict has been mostly contained in energy prices and not spread to other sectors. The BoC decided to hold rates unchanged at its last meeting.

• Upcoming (June 10): No change in the policy rate is expected. The BOC will likely refrain from making upward policy adjustments while price pressures remain manageable. The central bank expects soft growth in 2026 with a rebound in 2027. Unemployment reached a two-quarter high in April, while employment dropped 110,000. The bank is betting that weak demand will keep inflation in check.

Central Bank of Brazil (BCB): 

• Recent action (April 28): The BCB cut rates by 25 basis points. That brought the Selic rate to 14.5%, 50 basis points lower than its cyclical peak. If not for the war in Iran, the BCB may have pursued a larger cut.

• Upcoming (June 17): No change in the policy rate is expected. Policymakers refrained from providing forward guidance due to the volume of uncertainties. The BCB is likely to pause while observing the transmission of energy price shock. With inflation forecast to rise and inflation expectations above target, the bank’s inflation-fighting credibility remains on the ropes.

Bank of Japan (BOJ): 

• Recent action (April 28): No change in the policy rate in a 6-3 vote. The three dissents favored a 25-basis point hike to stem inflationary effects from the energy price spike. Core inflation, which excludes fresh food but includes energy in the case of Japan, edged below the BOJ’s target. Energy prices will send this higher in the months to come.

• Upcoming (June 16): The BOJ is forecast to hike 25 basis points, if not at this meeting, then the next. The BOJ raised its forecast for core inflation from 1.9% to 2.8% for 2026, while cutting its growth outlook. Short-term interest rates are still well below inflation, which underscores the need for a hike. The BoJ has been careful not to raise rates too rapidly given the high levels of debt and interest expense associated with it that the government carries. Three rate hikes are expected by the end of 2027.

Reserve Bank of India (RBI): 

• Recent action (April 7): The central bank revised its forecasts for growth, while inflation remains below the midpoint of the RBI’s inflation target range. It decided to remain on the sidelines and not change rates at its last meeting. 

• Upcoming (June 4): The RBI is expected to hike rates by 25 basis points. India is highly exposed to Middle East energy imports and has limited reserves. If oil prices remain in the $100 per barrel range on Brent, and the rupee continues to slide, then the RBI will be pushed toward raising rates more aggressively. The central bank will likely use a modest 25 or 50 basis point hike but could become more aggressive in its stance against inflation like we saw in the 2010s.

Bank of England (BOE):

• Recent action (April 30): No change in the policy rate in an 8-1 vote. The lone dissent opted for a hike. A soft labor market may keep the worst, but not all, of the conflict-induced price increases subdued.

• Upcoming (June 18): No change in the policy rate is expected. Coming into 2026, inflation for the year was forecast at 2.1%; it has already reached 3.3% and could top 4% by year-end. The move higher will likely be spurred by second-round effects reaching wages and non-energy prices. The BOE will opt for caution moving forward; hikes are possible.

Bank of Mexico (Banxico): 

• Recent action (May 7): Banxico cut 25 basis points in a 3-2 decision. Dissenters cited energy-driven inflation risks as reason to pause. Mexico’s self-suffiency in energy production has meant it is largely spared from the worst of the recent price spike. However, inflation due to the war is global in scope.

• Upcoming (June 25): No change in the policy rate is expected. Policymakers noted upside risks to inflation due to the Iran war were partially offset by government fuel policies. A first quarter contraction helped dampen concerns about inflation going forward. Banxico signaled that its cutting cycle has concluded. 

Reserve Bank of Australia (RBA): 

• Recent Action (May 5): The RBA hiked 25 basis points in an 8–1 vote. Inflation was accelerating prior to the shock. The RBA’s inflation fighting credibility is at risk.

• Upcoming (June 15): No change in the policy rate is expected. Capacity constraints make the pass-through to consumers more rapid. However, a softening labor market puts the RBA in a challenging position, as weaker demand could derail the remaining inflation via a rise in unemployment. Only one additional rate hike is expected by year-end.

People’s Bank of China (PBOC): 

• Recent action (May 20): It has now been 12 months since the PBOC’s last rate adjustment. Import, consumer and producer prices jumped on the energy price spike. Consumer prices hit annual highs not seen since February 2023. Those gains are offsetting the downward pressure we saw on price levels ahead of the crisis due to weak overall economic conditions. 

• Upcoming action (June 22): No change in the policy rate is expected. Stockpiled oil reserves provide a short-term buffer, while the implementation of export controls could extend the cushion. Even with policy rates in historically accommodative territory, consumption and retail sales growth continue to sputter, with the latter hitting a four-year low. 

Central Bank of Turkey (CBRT):

• Recent action (April 22): No change in the policy rate. The policy rate remains at 37% (down from a 50% peak at end-2024). The CBRT can pause on rate hikes, given that they remain in restrictive territory.

• Upcoming (June 11): The CBRT is forecast to continue cutting rates during 2026; the size of the cuts is now in question. Both core goods and services inflation cooled in April, while energy costs caused headline inflation to accelerate on an annual basis. With 10-year government bond yields up more than 750 basis points since the Iran war began, there will be pressure to control inflation while decreasing borrowing costs. That leaves the CBRT with little room to maneuver.