Markets have repriced interest rate expectations across major central banks following this week's policy decisions and speeches. The most notable shifts concerned the RBNZ, the BoC and the Fed. Shifts of this kind matter well beyond bond markets: interest rate differentials between currencies are a key driver of FX moves, and repricing of central bank paths feeds directly into volatility in majors, cross-rates and rate-sensitive assets.

Market pricing for rate hikes by year-end

• ECB: 46 bps (99% probability of a rate hike at the next meeting); 2027: 73 bps
• BoJ: 42 bps (75% probability of a rate hike at the next meeting); 2027: 111 bps
• Fed: 33 bps (50% probability of a rate hike at the next meeting); 2027: 46 bps
• RBA: 30 bps (69% probability of a rate hike at the next meeting); 2027: 32 bps
• BoE: 26 bps (91% probability of no change at the next meeting); 2027: 66 bps
• BoC: 26 bps (67% probability of no change at the next meeting); 2027: 99 bps
• RBNZ: 25 bps (76% probability of no change at the next meeting); 2027: 86 bps
• SNB: 5 bps (99% probability of no change at the next meeting); 2027: 44 bps

Last week's market pricing here. The 2027 pricing indicates the total amount of tightening expected by the end of 2027, not how much is expected in 2027 alone. These market-implied probabilities are derived from interest rate futures pricing and shift continuously as policymakers speak and new data arrives, which is why a single speech can move them materially within days.

RBNZ: Softer tone despite a hike

The RBNZ raised interest rates by 25 bps as expected, but the statement contained less hawkish language and the new OCR projections were left mostly unchanged. Relative to expectations, the overall decision came across as more dovish than anticipated. This kind of gap between the action taken and the accompanying communication is a recurring pattern in central banking: the policy move itself is often priced in advance, while the forward guidance in statements and projections is what drives the market reaction.

In July, the meeting minutes accompanying the statement said "the Committee agreed that while further OCR increases appear likely at upcoming meetings, their timing is highly uncertain". This week, the Committee said "future policy will depend on the Committee's judgement of the balance of risks to medium-term inflation. This approach allows the Committee to observe and assess the effects of reduced monetary stimulus". The change in wording indicates a reduced appetite for further tightening.

BoC: Hawkish hold

The BoC left interest rates unchanged as expected, but the statement carried more hawkish language. The central bank removed the reference to the policy rate being "appropriate" and warned that upside risks to inflation have increased. Governor Macklem surprisingly downplayed the recent US tariffs, noting that businesses have adjusted to tariffs and uncertainty. In previous meetings, the BoC had described US tariffs as important for policy decisions. The market interpreted the decision as more hawkish than expected. The shift on tariffs is notable because trade policy had been a stated input into the BoC's risk assessment, so downplaying it changes the frame through which the Bank's future communications will be read.

Fed: Volatile pricing after Jackson Hole and Waller

Fed rate pricing has been highly volatile since Warsh's speech at the Jackson Hole Symposium. Following his hawkish speech, the odds of a rate hike in September rose to 67% before stabilising around 60%. Fed Governor Waller then triggered a dovish repricing yesterday, lowering the probabilities to 50%. The episode illustrates how sensitive market pricing currently is to individual Fed voices, with officials on both sides of the debate moving probabilities by double digits.

Although Waller had taken a more hawkish stance at the beginning of the summer, he sounded less inclined to raise rates yesterday. He said he has finally been seeing signs of disinflation and added that he would not want to raise rates into a disinflationary environment. He said he would be willing to wait another month to "give disinflation a chance". He also noted that the September rate decision will depend on the upcoming CPI report, and that if the data comes in hot, he would consider a rate hike. That makes the next CPI release the key data point to watch for the September decision.

Source: ForexLive