Financial markets are recalibrating expectations for monetary policy worldwide, with traders increasingly betting against further easing by major central banks. From Australia to Europe and the United States, the consensus is shifting towards a more hawkish outlook, influenced by persistent inflation and resilient economic data. Money markets now indicate minimal expectation of additional interest rate cuts from the European Central Bank (ECB), assigning approximately a 30 per cent probability of a rate hike by the close of 2026.
In Australia, Reserve Bank of Australia (RBA) Governor Michele Bullock has dismissed the likelihood of further easing measures. Swap rates now imply the possibility of nearly two quarter-point rate increases by the end of the next year. Meanwhile, the Bank of Japan (BOJ) is widely anticipated to raise its benchmark interest rate by 25 basis points to 0.75 per cent next week. Markets anticipate at least one more rate increase from the BOJ next year.
Even in the United States, where the Federal Reserve is still projected to implement a rate cut this month, expectations for 2026 are being adjusted. Traders are now pricing in only two additional rate reductions for next year, a decrease from the three cuts anticipated late last month. This shift in sentiment reflects a broader reassessment of the global economic landscape and the potential for sustained inflationary pressures.
Jim Reid, Deutsche Bank AG’s global head of macro research, noted the increasing prevalence of markets pricing in rate hikes as the next policy move for various regions. He cautioned that such a development, if mirrored in the US, could significantly disrupt risk assets and the economic outlook for the coming year.
