Central bank scanner: Central banks buy time as Hormuz reopens

European Central Bank (ECB): 

• Recent action (June 11): The ECB raised the policy rate 25 basis points, as it attempted to move from a neutral to a more restrictive policy stance. Headline inflation reached 3.2% in May, its highest level since September 2023. Policymakers downgraded growth forecasts for both 2026 and 2027, while upgrading inflation forecasts for each year. 

• Upcoming (July 23): The reopening of the Strait of Hormuz decreases the probability of another rate hike as energy prices are cooling.  Financial markets agree and have removed another hike in rates by the ECB this year.

Federal Reserve (Fed)

• Recent action (June 17): Participants voted unanimously to change the statement following the meeting. That was a win for Chairman Warsh, who campaigned to limit forward guidance. The statement removed the easing bias that hawks on the committee objected to in April. The stronger signal was in the forecasts released at the conclusion of the meeting. Inflation was revised up, while unemployment was revised down and not surprisingly, more participants penciled rate hikes. Nine expect at least one rate hike by year-end; eight had no moves, and one kept a cut in place. Chairman Kevin Warsh abstained and announced several task forces to review how the Fed communicates and conducts policy going forward. That is a sign of the buy-in that will be required to make changes he has proposed.  

• Upcoming (July 29): Warsh would like to limit Fed signals on the direction of policy. That will take time. In the interim, the leadership is still talking openly about the spectrum of debate within the Fed. We expect two rate hikes by year-end due to the persistence of inflation beyond the effects of the conflict in the Middle East. 

Bank of Canada (BOC):  

• Recent action (June 10): Energy prices have moved higher with limited pass-through to other categories. The BoC decided to hold rates unchanged at its last meeting. That makes five straight meetings without a policy change.

• Upcoming (July 15): The BOC will likely remain on the sidelines while price pressures remain manageable. Demand has been weak and is expected to remain subdued until 2027, when a round in growth is expected.  

Central Bank of Brazil (BCB): 

• Recent action (June 17): The BCB cut rates by 25 basis points. That brought the Selic rate to 14.25%, 75 basis points lower than its cyclical peak. If not for energy prices and inflation uncertainty stemming from the conflict in Iran, the BCB may have pursued a larger cut. The BCB has been slow to cut rates, asserting its independence and credibility in combatting inflation.

• Upcoming (August 4): The BCB is expected to cut 25 basis points on better inflation news going forward. Cooling energy prices, coupled with the lingering effects of higher rates for longer earlier in the cycle, are expected to take the steam off inflation later in the year. 

Bank of Japan (BOJ): 

• Recent action (June 16): The BOJ raised the policy rate 25 basis points in a 7-1 vote. The lone dissent cited more concern with downside risks to employment and manufacturing than upside risks to inflation. Core inflation, which excludes fresh food but includes energy in the case of Japan, remains below the BOJ’s target. 

• Upcoming (July 31): The BoJ has been careful not to raise rates too rapidly given the high levels of debt and the associated interest expense. That has slowed the pace, but not the direction of rate adjustments, which is still up due to concerns that inflation is becoming entrenched. Two more incremental hikes are expected in 2027.

Reserve Bank of India (RBI): 

• Recent action (June 5): Policymakers held rates steady while waiting for the Strait of Hormuz to reopen. India turned to Russia and relied more heavily on coal to meet its energy needs. Some rationing was imposed to ease the surge in energy-related costs. The central bank revised down its growth forecast and raised its inflation estimate. Higher liquefied petroleum gas costs, key for domestic cooking, along with rising metals, plastics and rubber prices drove the increase in inflation.

• Upcoming (August 5): The RBI is expected to hike rates by 25 basis points. The weak rupee and swelling inflation put policymakers in a tough spot by causing what could be a self-feeding rise in inflation. The RBI expects output to expand at a solid 6.5% clip in 2026, which would mark the slowest pace for growth since the pandemic. Up to three additional rate hikes are likely over the next two years.

Bank of England (BOE):

• Recent action (June 18): The BoE decided to hold rates steady with a vote of 7-2. The two dissents were in favor of a rate hike. A cooling labor market and slowdown in economic momentum may eliminate some, but not all, conflict-related price increases.

• Upcoming (July 30): Headline inflation cooled from 3.3% to 2.9% from March to May. The reopening of the strait will limit second-round effects reaching wages and non-energy prices. The BOE will sound hawkish but opt for caution moving forward; hikes are possible but not expected.

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-sufficiency in energy production blunted the worst energy effects of the conflict in the Middle East but no one escaped all the conflict’s effects.

• Upcoming (June 25): The economy is on the precipice of a recession after a first quarter contraction. That means policymakers will be hesitant to raise rates to fight price pressures. Banxico signaled that its cutting cycle has concluded. 

Reserve Bank of Australia (RBA): 

• Recent Action (June 16): The RBA held rates steady in a 9–0 vote. The policy rate is up 75 basis points this year. Oil shock pass-through to non-energy goods and services is evident. 

• Upcoming (August 11): Policymakers remain prepared to further raise rates to preserve inflation fighting credibility. That is not imminent. The unemployment rate has reached the highest level in four years, putting the RBA in a tough position. One additional rate hike is expected by year-end.

People’s Bank of China (PBOC): 

• Recent action (June 21): It has now been 13 months since the PBOC’s last rate adjustment. Energy prices caused consumer and producer prices to surge over the last few months. Those gains are offset by the downward pressure we saw on price levels ahead of the crisis due to weak overall demand. 

• Upcoming action (July 20): Stockpiled oil reserves provide a short-term buffer, while the implementation of export controls could extend the cushion. Look for solid growth in the first quarter on export strength. The ceasefire will help China to restock its oil reserves. 

Central Bank of Turkey (CBRT):

• Recent action (June 11): The policy rate remained at 37% (down from a 50% peak at end-2024) for the fifth straight meeting. As conflict-driven inflation affects the economy, the CBRT can hold rates flat as they are currently in restrictive territory.

• Upcoming (July 23): The CBRT is forecast to continue cutting rates during 2026; the size of the cuts is in question. Policymakers reaffirmed support for keeping rates in restrictive territory but struck a more dovish tone. Domestic demand is weakening and the 10-year government bond yield is up 550 basis points since the Iran war began.