How Interest Rate Expectations Shifted After This Week’s Events
Key Takeaways
- •Markets price the RBNZ as the most hawkish central bank with 52 basis points of expected year-end hikes, compared with only 5 basis points for the SNB.
- •The Treasury buyback, which repurchases older and less liquid debt, eased financial conditions by pulling long-term yields lower while raising inflation expectations on debasement worries.
- •Japan's core CPI matched forecasts at 1.8% year over year, still under the 2% target, and a Bank of Japan September rate hike is already largely priced in as part of its normalization cycle.
- •Trump's vow of crushing economic pressure on Iran raises the risk of a prolonged standoff that could support or lift oil prices and intensify inflation pressure.
- •Treasury Secretary Scott Bessent said a Monday press conference will detail actions against Iran and that the sanctions will be the toughest in history.
Rate hikes by year-end
- RBNZ: 52 bps, with a 91% probability of a rate hike at the next meeting
- ECB: 40 bps, with a 94% probability of a rate hike at the next meeting
- BoJ: 35 bps, with a 67% probability of a rate hike at the next meeting
- BoE: 27 bps, with an 81% probability of no change at the next meeting
- Fed: 23 bps, with a 65% probability of no change at the next meeting
- BoC: 20 bps, with a 97% probability of no change at the next meeting
- RBA: 15 bps, with an 85% probability of no change at the next meeting
- SNB: 5 bps, with a 91% probability of no change at the next meeting
The spread between the most and least hawkish paths — 52 bps of expected hikes at the RBNZ versus 5 bps at the SNB — underscores how uneven the global rate cycle has become, a divergence with knock-on effects for the borrowing costs and currencies tied to each economy.
Two major events shaped markets this week: the Treasury buyback announcement and Donald Trump’s pledge to strangle Iran economically.
On the data front, there was nothing that materially changed the outlook for central banks. In the UK, the latest employment and inflation reports reinforced the Bank of England’s current “wait and see” approach, with soft jobs data and consumer price inflation broadly in line with expectations.
The same broad assessment applies to the Reserve Bank of Australia and the Bank of Canada. Australia’s jobs data came in weaker than expected, while Canada’s underlying inflation measures continued to hover around target.
In Japan, core CPI — the measure targeted by the Bank of Japan — matched expectations at 1.8% year over year, up from 1.6% in the prior month but still below the 2% target. Markets already expect the BoJ to raise interest rates in September, so that move is largely priced in. Traders will instead be watching for any signs of faster tightening beyond that, with September seen as the next step in a normalization cycle that began when Japan exited its negative-rate policy in 2024.
The Treasury buyback announcement eased financial conditions as long-term Treasury yields declined, while inflation expectations rose on concerns about debasement — the worry that heavy government borrowing erodes the long-term value of the currency. Buybacks work by having the Treasury repurchase outstanding debt, typically older and less liquid issues, which supports bond prices and pulls long-term yields lower. That is likely to remain a central market theme in the coming weeks, with traders focused on how the Federal Reserve responds as Treasury Secretary Scott Bessent’s intervention runs counter to the central bank’s objective.
On Iran, Trump vowed crushing economic warfare against Tehran, raising the prospect that the deadlock could last longer than markets had expected. That could keep oil prices supported or push them higher, adding to inflation pressure. As one of OPEC’s larger crude producers, Iran is the channel through which the standoff reaches global oil markets.
Bessent said there will be a press conference on Monday to discuss actions against Iran and added that the sanctions will be the toughest in history.
