Rate 'Superweek' Begins... U.S., EU, and Japan Expected to Hold Rates

High oil prices add to upward pressure on inflation
Markets watch for signals on the future rate path
Rate hikes possible in New Zealand and Canada

This week is a “superweek,” with five major central banks set to announce their benchmark interest rate decisions in succession. The U.S. Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of Japan (BOJ) are widely expected to hold rates steady. By contrast, expectations are leaning toward rate hikes in Canada and New Zealand. As the high oil prices triggered by the Iran war continue to take a toll, markets are watching for signals about the future path of interest rates in central bank press conferences.

Fed Chair Kevin Warsh. AP-Yonhap News

According to the Financial Times (FT) on Oct. 25 (local time), the Federal Reserve is expected to hold its benchmark interest rate steady at the Federal Open Market Committee (FOMC) meeting on Oct. 28. Futures markets for the federal funds rate put the probability of a hike this month at just 9%.

Market expectations for a rate hike fluctuated sharply around the release of the September Consumer Price Index (CPI). The CPI rose 0.6% from the previous month, its biggest increase in five months. The year-over-year increase also accelerated to 3.7%. The probability of a rate hike, which had stood at around 20% immediately before the report, briefly surged to about 50% after inflation came in higher than expected, before quickly falling back.

Comments from Fed officials also influenced market expectations. Ahead of the CPI report, New York Fed President John Williams and others said there was no need to rush into further rate hikes. While Fed Chair Kevin Warsh refrained from making comments that could signal the Fed’s next move, remarks by other Fed officials pointing to a possible hold led markets to scale back their expectations for a hike.

The fact that price increases have eased somewhat in their spread across various categories, and that the rise in U.S. Treasury yields has already tightened financial conditions, are also cited as reasons to hold rates steady.

The day after the FOMC press conference, on Oct. 29, the United States will release its advance estimate of third-quarter gross domestic product (GDP) and the September Personal Consumption Expenditures (PCE) price index. Growth and inflation data due immediately after the FOMC meeting could determine interest rate expectations for the end of the year.

If both strong growth and inflation are confirmed, expectations for another rate hike in December could gain momentum. The FT reported that investors have priced in two or three additional rate hikes by the end of 2027.

ECB and BOJ widely expected to hold rates; Canada and New Zealand seen hiking 

Bank of Japan (BOJ). Reuters-Yonhap News Agency

Europe and Japan are also expected to hold their benchmark interest rates steady. The prevailing expectation is that the ECB will keep its benchmark rate at 2.50% on Oct. 29. Although higher energy prices continue to put upward pressure on inflation, economic uncertainty and financial market instability stemming from a sharp rise in French government bond yields are also growing. The FT reported that the ECB is expected to hold rates at this meeting amid these conditions.

The BOJ is also expected to hold its benchmark rate at 1.25%. Having raised rates last month, it is more likely to monitor inflation, wages and the yen’s movements than to raise rates again in quick succession. However, a survey found that loan demand among Japanese companies is increasing and financial conditions remain accommodative. Markets are therefore watching how the BOJ will address the possibility of further rate hikes after December.

During the same week, the Bank of Canada and the Reserve Bank of New Zealand will announce their policy rate decisions. The Bank of Canada will announce its benchmark rate and economic outlook on the same day, while the Reserve Bank of New Zealand will set its official cash rate (OCR), its benchmark rate. The policy rates in Canada and New Zealand are 2.25% and 2.75%, respectively.

In Canada, expectations are leaning toward a 0.25-percentage-point rate hike on Oct. 28. Inflation stood at 3.1% in September, exceeding the upper end of the target range, while business and consumer surveys showed that inflation expectations had risen. If the hike goes ahead, it will be the first in a year.

New Zealand is also widely expected to raise its policy rate from 2.75% to 3.00% on the same day. The Wall Street Journal (WSJ) reported that the expectation reflects concerns that rising oil prices and a weaker New Zealand dollar could push inflation higher.

Even if major central banks hold their benchmark rates steady, markets are unlikely to be reassured. Upward pressure on inflation from rising oil prices is intensifying, while concerns about fiscal conditions are also growing.

The U.S. fiscal burden, a sharp rise in French government bond yields and market concerns over AI investment are also cited as factors driving volatility in bond and stock markets. Therefore, the direction of bond and stock markets is expected to depend on how the heads of central banks view the inflation shock. 

This content was produced with the assistance of AI translation services.