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Key Takeaways

The Federal Reserve (Fed) and Bank of Canada (BoC) have turned more hawkish, but the next steps remain data-dependent. The Fed's hiking cycle likely isn’t over. Softer jobs data argue for an October pause, but with core Personal Consumption Expenditures (PCE) still at 3.0% and the Fed’s most recent Summary of Economic Projections (SEP) signaling another interest-rate hike,  a hike of  25 basis points (bps) seems likely in December. For the BoC, the next move is more likely up than down. The BoC should hold in October, but broadening inflation and BoC Governor Tiff Macklem’s warning against being “too slow to respond” keep a hike in play if core inflation firms.

Europe is moving further into tightening territory, albeit at different speeds: The European Central Bank (ECB) has now delivered two hikes, and another move in December looks likely, while the Bank of England (BoE) is being pushed closer to action as inflation risks rise and the growth trade-off becomes less severe. Norges Bank has returned to its previous peak policy rate and may yet hike again, while the Riksbank is moving gradually back toward neutral. The Swiss National Bank (SNB) remains the exception, with higher inflation risks not yet sufficient to warrant a hike.

Asia is firmly on a hiking path: With growth holding up more resiliently despite the Middle-East energy risks, inflation has become a bigger focus for central banks in Asia with the Reserve Bank of India (RBI) finally raising rates and Bank of Korea (BoK) expected to do more. The Bank of Japan’s (BoJ’s) December hike also sits firmly on the table as wages remain resilient and inflation sticky. Both the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA) are expected to hike further, despite having tightened already year-to-date. The People’s Bank of China's (PBoC) easing should stay targeted and incremental, not large-scale stimulus. A stronger yuan gives the PBoC more room to cut rates without immediately reigniting depreciation pressure.

The Franklin Templeton Fixed Income (FTFI) Central Bank Watch is a qualitative assessment of the central banks for the Group of Ten (G10) nations plus three additional countries (China, India and South Korea). Each central bank is scored on three parameters: Inflation Outlook Perception, Quantitative Easing/Liquidity Management Programs, and Interest Rate Forward Guidance. Each parameter can be scored from a range with a minimum of –2 (dovish) and a maximum of +2 (hawkish). The methodology for scoring compares the latest monetary policy statement/press statements with prior ones to see how the language and tone regarding each of these parameters may have changed over time. The scores are ultimately aggregated for each central bank, with a final FTFI score ranking each from –6 (for most dovish) to +6 (for most hawkish). We also provide our one-year ahead policy rate expectations and compare our rankings and expectations with market implied policy rates to evaluate the difference between our expectations/rankings and market expectations/rankings.

Download the complete PDF to see our latest thoughts on global central bank policy.

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