Over the past month, rates have continued to rise across maturities and regions. The global economy has shown more positive signs, supported by a manufacturing sector benefiting from massive investment in AI. In addition, the continued blockade of the Strait of Hormuz and attacks on several refineries have pushed energy prices higher, with oil above USD100/bbl and European gas at around EUR80/MWh. Central banks continue to raise policy rates and the ECB in particular is showing increased concern about the potential spillover effects of energy prices on underlying inflation. Combined with an improving nominal growth engine, this has pushed long-end rates higher. The first rate hike from the Fed since 2023 and the prospect of more hikes over the coming year have sent US rates higher across the curve.
Fed: The beginning of rate hikes
Since our last Yield Outlook publication, the Fed has delivered a rate hike, lifting the key policy rate to 3.75-4.00%. There was broad agreement in the monetary policy committee on the decision, and a majority of members saw a further rate hike before year-end, while 8 out of 18 members saw another one in 2027. Growth expectations were revised up and the unemployment forecast down. The inflation forecast was largely unchanged, while almost all members saw the risk of higher inflation as greater than the risk of lower inflation. This is in line with our expectation that the Fed will deliver two further rate hikes in December 2026 and March 2027, respectively, bringing the key policy rate to 4.25-4.50%.
ECB: Following developments in energy prices
As expected, the ECB raised its key policy rate to 2.50% at its latest meeting in September and described the decision as a “no brainer”. More surprising, however, was the communication on the inflation outlook, where the Governing Council now expected inflation to be “well above target for an extended period”. This was despite inflation having been lower than expected in recent months, with no clear signs that high energy prices are spilling over into underlying inflation. ECB President Lagarde also repeatedly highlighted the brighter growth outlook. Therefore, we now expect the ECB to deliver two further rate hikes over the coming year, in October and December 2026, respectively, bringing the key policy rate to 3.00% by year-end. Later, we expect one rate cut at the end of 2027. The timing of the rate hikes remains uncertain and is highly dependent on developments in the energy market. The risk picture remains two-sided. A stronger growth engine in Europe, supported by increased consumption and rising pressure in core inflation, could trigger more rate hikes. Conversely, a sharp decline in energy prices and continued low core inflation would reduce the need for further rate hikes.