Don’t expect good news from central banks

On Tuesday, the Bank of Japan kept its official interest rate at 0.75%, as expected. However, three members voted in favor of raising it to 1% as the core inflation is approaching 2% and real interest rates remain deeply negative.

According to BOJ, the timing and pace of any future moves will depend on developments in the Middle East and broader economic and financial conditions. In practice, though, it is in a tough spot. It simply cannot afford to fight inflation too aggressively, as the economy would struggle with higher debt-servicing costs.

As for the ECB, the Bank of England, and the Bank of Canada, they are also expected to keep rates on hold for now, with a growing tilt toward tightening, even though, before tensions in the Middle East escalated, rate hikes were not even on the table. In the US, the situation is not much better; still, with the S&P 500 and the Nasdaq holding up well, and speculation around a SpaceX IPO gaining momentum as the company advances toward potential listing plans, it seems investors are not too concerned.

In the eurozone, the energy shock driven by disruptions around the Strait of Hormuz has already pushed inflation to 1.2% month over month and 2.5% year over year. As a result, for the first time since 2022, around 44% of investors now expect the ECB to hike, potentially as soon as June, to roughly 2.25%.

In the UK, inflation came in at 3.3% in March, well above the Bank of England’s 2% target, largely driven by higher fuel costs. As a result, markets are once again pricing in tightening, with futures currently pointing to one rate hike in 2026. This has also filtered through into FX markets, with GBP/USD showing renewed sensitivity to rate differentials and shifting expectations.

This shift has also led to a sharp rise in government bond yields, with 10-year yields in both regions climbing more than 15% since the start of the Middle East crisis.

Finally, in Canada, inflation has picked up to 2.4% month over month, but core inflation has eased slightly to 1.9%. Although the regulator itself does not yet forecast a hike due to uncertainty over how long the conflict will last or how far the economic fallout will spread, markets are pricing in a rate hike in 2026.

As for the Fed, futures markets are no longer expecting any rate cuts this year, with the next possible move not priced in until October 2027. Even with a new Fed chair, the overall direction is unlikely to shift much since decisions are made collectively, and in the current inflation environment, it is hard to see a majority of policymakers going along with pressure from the White House.