QHave interest rates peaked?

The outlook for interest rates, the primary tool used by central banks for combatting inflation, varies across regions.

In the US, there is uncertainty over whether there are more rate hikes to come, and how long the Federal Reserve will keep them at their peak. The Fed has been expressing a more cautious tone, often referred to as ‘hawkish’, indicating a potential inclination to take more aggressive measures to control inflation. But the market is effectively calling their bluff, by pricing in limited further hikes and rate cuts to below 4% by the end of 2024.

In the Eurozone, the ECB raised rates by 0.25% in May and it’s expected that there will be two further hikes to a potential terminal deposit rate of 3.75%. This is the rate that the market believes the ECB will pause at, as it seeks to bring inflation down to its 2% goal.

The UK has the most hawkish view, with a surprising 0.50% rate hike in June and the expectation that more rate hikes will come. This is likely the result of more persistent inflation, which the Bank of England (BoE) is laser focused on keeping in check.

The clear outlier across major economies is Japan, with its central bank maintaining ultra-loose monetary policy with a negative short-term rate. This dovish approach has been out of kilter with other economies and resulted in capital flight from Japan and depreciation of the Yen.