After several months of status quo, investors are bracing for rate hikes in June from the ECB, the Bank of England and the Bank of Japan.
Last week, the G4 central banks – the Fed, ECB, BoE, and BoJ – all held rates steady. While the bar for a hike still appears quite high for the Fed, the other three central banks are expected to take action next month.
At the ECB, during Thursday's press conference Christine Lagarde confirmed that the prospect of a rate increase had been discussed. Hours later, two sources told Reuters that they expected an initial rise in June.
Since then, several ECB members, including Bundesbank President Joachim Nagel, have said that a June rate hike may prove necessary. In April, Eurozone inflation climbed to 3%, its highest level since September 2023. Markets are now pricing in between two and three rate hikes in 2026.
On Thursday, the Bank of England also left rates unchanged. While the MPC (Monetary Policy Committee) has accustomed us to split decisions, this one was relatively clear. Out of its nine members, only Chief Economist Huw Pill voted for a 25bp increase.
Although the decision and Andrew Bailey's comments somewhat scaled back bets on the extent of BoE tightening through 2026, a June hike remains the most likely scenario.
In Japan, economists characterized the BoJ's decision as an "offensive status quo." Indeed, one-third of the monetary policy committee members voted in favor of a rate increase.
Japan's situation, however, differs significantly from that of other central banks. Rate hikes were already the projected path at the start of the year. With rates at just 0.75%, the Bank of Japan maintains an accommodative stance. The neutral rate is estimated to be around 1.5%.
Rate hikes are also necessary to prevent the depreciation of the yen. Last week, the Ministry of Finance was again forced to intervene in the foreign exchange market as the yen approached the 160 mark against the dollar.
Raising rates remains perilous because the energy crisis relating to the conflict in Iran represents a stagflationary shock; it brings both higher inflation and lower growth. Rate hikes therefore risk further slowing activity. Conversely, central banks cannot remain idle when inflation rebounds. The risk is that inflationary expectations rise, ultimately prolonging the inflationary shock.
Until now, central banks have primarily hardened their rhetoric. In short, they stand ready to raise rates if necessary. This signaling alone has significantly pushed up interest rates. Monetary tightening has therefore already occurred to some extent, with the market doing the heavy work. But this game cannot last indefinitely, and central bankers must eventually act to maintain their credibility. Indeed, June could mark that turning point.
