Rates Ruckus
Market Expectations Of Total Policy Rate Changes in 2026
During a week with a flurry of central bank meetings and surging energy prices, investors dramatically repriced expectations for global monetary policy. Bond investors shifted from expecting two rate cuts this year in the U.S. to almost none, and from two rate cuts to two rate hikes in the U.K. But is the rapid repricing justified? Well, with the 2022 oil price spike and the subsequent surge in inflation still fresh in the mind, it makes sense that policymakers are worried that household inflation expectations could become unanchored after a series of shocks and five years of above-target inflation. However, we doubt 2026 will be a repeat of 2022, as global economies are on a completely different footing today. When oil prices spiked in 2022, global labor markets were very tight, goods prices had already surged following the largest supply shock in decades, and government transfers were massive. Today, in contrast, major economies are collectively shedding jobs on average, particularly in the U.S. and the U.K., which could dampen the pass-through of higher energy prices into inflation and worsen the drag on growth. Perhaps a jolt to global bond markets presents opportunities for discerning investors who have a different view from what’s priced in.
