Global Rate Hike Expectations: Dovish Repricing Across Major Central Banks as Middle East Tensions Ease
Key Takeaways
- •Falling oil prices and reduced Middle East tensions prompted markets to adopt a more dovish interest rate outlook for nearly all major central banks.
- •The Reserve Bank of New Zealand maintains the highest market-implied rate hike expectations at 50 basis points by year-end.
- •The US Federal Reserve is priced for 32 basis points of hikes by year-end, reflecting a balance between elevated core inflation and cooling labor demand.
- •The Bank of Japan uniquely saw a hawkish repricing due to remarks from US and Japanese officials suggesting potential policy alignment after currency intervention.
- •Markets anticipate near-certain rate holds for the Bank of Canada and the Swiss National Bank, consistent with their earlier rate cuts.
Market-Implied Rate Hikes by Year-End
| Central Bank | Expected Hikes by Year-End | Next Meeting Probability |
|---|---|---|
| RBNZ (Reserve Bank of New Zealand) | 50 bps | 85% probability of a rate hike |
| ECB (European Central Bank) | 33 bps | 75% probability of a rate hike |
| Fed (US Federal Reserve) | 32 bps | 54% probability of a rate hike |
| BoJ (Bank of Japan) | 32 bps | 51% probability of a rate hike |
| BoE (Bank of England) | 25 bps | 79% probability of no change |
| BoC (Bank of Canada) | 15 bps | 98% probability of no change |
| RBA (Reserve Bank of Australia) | 13 bps | 97% probability of no change |
| SNB (Swiss National Bank) | 7 bps | 96% probability of no change |
Dovish Repricing Driven by Middle East De-escalation and Falling Oil Prices
Financial markets adjusted interest rate expectations slightly more dovish this week across nearly all major central banks. The shift followed a de-escalation of tensions in the Middle East and growing optimism surrounding a potential US-Iran agreement. Oil prices dropped below $80 per barrel, helping to ease inflation concerns that had previously supported expectations of tighter monetary policy. Energy costs are a significant input to headline inflation measures across major economies, and sustained lower oil prices can reduce pressure on central banks to maintain a restrictive stance.
Among the central banks tracked, the Reserve Bank of New Zealand (RBNZ) continues to show the highest market-implied rate hike expectations at 50 basis points by year-end, with an 85% probability of a hike at its next meeting. The European Central Bank (ECB) follows at 33 basis points, with a 75% probability of a rate increase at its upcoming meeting.
The US Federal Reserve and the Bank of Japan are both priced at 32 basis points by year-end, though with different next-meeting probabilities — 54% for the Fed and 51% for the BoJ. For the Fed, the modest implied hike path reflects a market balance between still-elevated core inflation and signs of cooling labor demand heading into the latter part of the year.
The Bank of England (BoE), Bank of Canada (BoC), Reserve Bank of Australia (RBA), and Swiss National Bank (SNB) all show substantially lower hike expectations, with high probabilities of no change at their respective next meetings. For the BoC and SNB in particular, markets are pricing near-certainty of holds, consistent with both having already begun cutting rates earlier in the cycle.
Bank of Japan Sees Hawkish Repricing
The Bank of Japan was the only central bank to experience a slightly hawkish repricing this week. The shift appears largely driven by remarks from US Treasury Secretary Bessent during a CNBC interview. Bessent stated that "it will require policy to follow up on the intervention" and added that the "US would not have joined if it was not optimistic about Japan policies."
Japan's currency diplomat Mimura further reinforced this signal, stating that he had a shared understanding with the BoJ following the intervention — a remark that could hint at the possibility of accelerated rate hikes from the Japanese central bank. The comments are notable given that Japan has maintained an ultra-loose monetary policy stance far longer than its global peers, and coordinated currency intervention has historically required alignment between fiscal and monetary authorities on the policy outlook.
