Central Banks in G10 Tighten Policy in Response to Global Energy Price Shock
By Stefano Rebaudo and Sophie Kiderlin
G10 Central Banks: Current Policy Stance and Outlook
Sept 17 (Reuters) - Major central banks are on a tightening path, with the Federal Reserve recalibrating its policy to a more restrictive stance on Wednesday, even as traders continue to price in a more aggressive policy response than projected in the U.S. central bank's so-called dot plot.
Economists say markets are overpricing future rate increases amid fears the oil shock could worsen after Houthis seized a strategic stretch of Red Sea coastline, a move seen as signalling a more assertive stance by Iran-backed militia.
Here's where central banks in the Group of 10 developed economies stand, ranked from highest to lowest policy rate.
1/ Australia
Reserve Bank of Australia Policy Moves
The Reserve Bank of Australia has hiked interest rates three times this year to 4.35%, entirely undoing last year’s cuts.
Outlook and Market Expectations
The door to another hike looks firmly open, especially after a hot July inflation print. The central bank’s deputy governor said policymakers would debate the case for a hike at their meeting later this month.
Markets are broadly expecting the central bank to hike rates then.
2/ Norway
Norges Bank Policy Status
Norway has one of the highest rates in the G10 and is likely nearing the end of its hiking cycle. Norges Bank, which meets on September 24, left rates unchanged at 4.25% in August and noted that inflation had softened.
Economic Growth and Rate Outlook
The economy meanwhile grew at a slower pace than economists had expected in the second quarter, at just 0.3%, while markets price in one more quarter-point hike by year-end.
3/ Britain
Bank of England's Latest Decision
The Bank of England on Thursday kept rates steady, as expected, at 3.75%. Three of the rate setters voted for a hike - he same number as at the central bank’s previous meeting.
Inflation Concerns and Future Moves
But policymakers also sounded the alarm on inflation, with Governor Andrew Bailey warning that prolonged conflict in the Middle East may require tighter policy.
Markets were last pricing in at least one rate hike from the BoE this year, with a chance of another.
4/ United States
Federal Reserve's Policy Actions
The Fed raised rates and flagged more hikes, in a move that soothed concerns about the central bank's independence in the face of President Donald Trump's demands for lower rates.
Market Projections vs. Fed Guidance
Without that clear signal, investors may have questioned whether a Kevin Warsh-led Fed would remain committed to taming inflation, potentially weighing on U.S. assets.
However, while policymakers project one more rate hike in 2026 and a hold in 2027, traders are pricing in more than one increase this year and roughly three moves by the end of 2027.
5/ New Zealand
Reserve Bank of New Zealand's Recent Moves
The Reserve Bank of New Zealand hiked rates for the second consecutive meeting to 2.75% earlier this month, as expected. But it also hinted that more tightening would likely be measured as risks to the economic outlook grow.
Economic Data and Market Expectations
The latest economic growth data meanwhile came in above expectations, signalling resilience. Markets are pricing in at least one more hike by year-end.
6/ Euro Zone
ECB's Response to Energy Prices
The European Central Bank raised rates for the second time this year earlier this month, and struck a hawkish tone as energy prices rise.
Growth Risks and Inflation Outlook
Markets price in at least one further hike by year-end and a deposit rate above 3% in 2027. But some economists expect the energy shock to weigh on economic growth and help curb inflationary pressures into next year.
7/ Canada
Bank of Canada's Policy Stance
The Bank of Canada left rates on hold earlier this month, but Governor Tiff Macklem said it could raise rates multiple times if inflation remained elevated.
Shifting Risks and Market Pricing
That marked a departure from his previous messaging that upside risks to inflation and downside risks to growth were broadly balanced.
Since then, signs of a cooling labour market have emerged and trade tensions with the United States cloud the economic outlook. Still markets price in another hike by year-end.
8/ Sweden
Riksbank's Dovish Position
Sweden's Riksbank is in the dovish camp, and expected to keep its key policy rate at 1.75% when it meets later this month.
Inflation Data and Future Expectations
August inflation figures came in below expectations, cementing that view.
Still, markets expect rates to rise later this year.
9/ Japan
Bank of Japan's Anticipated Hike
The Bank of Japan is expected to hike rates to 1.25% at a highly anticipated meeting later this week, but investors will be keen to see how hawkish policymakers sound after the meeting.
Long-Term Rate Projections and Market Impact
Economists polled by Reuters expect rates to rise to 1.75% in the second quarter of 2027, earlier than previously thought.
The spotlight for financial markets remains on potential repatriation flows from Japan's Government Pension Investment Fund as rising domestic yields boost the appeal of local assets.
10/ Switzerland
Swiss National Bank's Steady Approach
Markets expect the Swiss National Bank to hold its key rate at 0% when it meets on September 24 and leave it there well into next year.
Inflation, Growth, and Currency Effects
Data showing a rise in consumer prices and strong economic growth have raised the prospect of an earlier move. Still, a strong Swiss franc has helped dampen inflation, reducing the need for tightening.
(Reporting by Stefano Rebaudo in Milan and Sophie Kiderlin in London; Editing by Dhara Ranasinghe, Joe Bavier and Chizu Nomiyama )