Rate hikes by year-end
- RBNZ: 75 bps (79% probability of rate hike at the next meeting)
- ECB: 52 bps (89% probability of rate hike at the next meeting)
- BoJ: 42 bps (71% probability of rate hike at the next meeting)
- BoE: 32 bps (94% probability of no change at the next meeting)
- BoC: 28 bps (99% probability of no change at the next meeting)
- RBA: 18 bps (93% probability of no change at the next meeting)
- Fed: 13 bps (99% probability of no change at the next meeting)
- SNB: 11 bps (97% probability of no change at the next meeting)
The main theme of this week has been US-Iran deal optimism as several reports since the weekend have been pointing to an imminent breakthrough. That breakthrough hasn't come yet, but it still led to a sizeable drop in oil prices and a dovish repricing in interest rate expectations for most central banks.
The biggest changes were seen in the RBA and RBNZ pricings. For the RBA, the market continues to scale back rate hike expectations, with traders not seeing any more rate hikes coming this year. This is due to meaningful softening in Australia's economic data recently, with the unemployment rate jumping to the highest level since 2021 and monthly headline inflation slowing way below RBA's forecasts.
For the RBNZ, the central bank held its Official Cash Rate steady at 2.25% but delivered a hawkish surprise. The central bank revealed that its decision was split 3-3, forcing a casting vote, and explicitly warned that interest rates will likely need to be increased sooner and more aggressively than previously forecasted. Traders rushed to price in a rate hike coming already at the next meeting in July with probabilities now standing at 79%.
This divergence between RBA and RBNZ has also led to the largest single-day decline in the AUD/NZD pair since 2022.
Notably, the market is still pricing in a 71% chance of a BoJ rate hike in June, which is way out of touch with the reality. BoJ Governor Ueda made it pretty clear that they will wait for the second half of 2026, and they will want to see the US-Iran conflict to end before delivering a rate hike that could just unnecessarily weigh on economic activity. The Japanese inflation data hasn't been calling for urgent rate hikes at all.
