Markets are pricing in new interest rate hikes in major economies throughout this year. Our analysis points to a different trajectory and we doubt that the consensus expectations will be met.
For much of 2026, we suggested that major central banks would not need to fulfil the anticipated interest rate hikes. Recent data has somewhat reaffirmed this view. More moderate policies than those anticipated by the markets —including changes to the official bond purchase programmes recently announced by the US Treasury— should support fixed income markets. More favourable profit or cash flow forecasts, combined with lower discount rates, could also constitute a very effective combination for risk assets, such as equities.
However, the trajectory of constant nominal growth and stable or declining interest rates is not guaranteed, as there have been only a few occasions in the last 40 years when these conditions were met (without a major external disruption). On very rare occasions, other global central banks followed suit. Looking back at those periods, some aspects of 2016 and 2019 may serve as a guide.
History rarely repeats itself, but it may have similarities
If we review the dozen "surprise" episodes from the Fed over the last four decades (in which the Fed kept rates unchanged or cut them when hikes were expected), eight of them aimed to restore growth and/or financial stability. When analysing these episodes, there are aspects of 2016 and 2019 that deserve more detailed attention.
In both 2016 and 2019, global central banks did not implement the anticipated interest rate hikes, and some even opted to ease their monetary policy. In 2016, Janet Yellen's Fed implemented only one of the four expected rate hikes; the Bank of England (BoE) eased its policy following Brexit; and the ECB cut rates even further, entering negative territory when hikes were expected. The rate shock in the fourth quarter of 2018 prompted the famous "pivot" from the Fed and other central banks, and the ECB resumed quantitative easing. Both growth and inflation were lower in 2016 than they are today, while 2019 was similar. In both years, risk markets experienced strong rebounds, especially following the 2019 episode.
Currently, notable differences persist, especially higher asset valuations than those seen in any of those previous periods. However, two parallels stand out. In 2016, a key debate within the Fed was the possibility of allowing the economy to "run at full capacity" for a brief period to achieve better medium- to long-term growth outcomes. While in 2016 the supply-side tension was focused on the labour market, in 2026 it centres on CAPEX investment related to artificial intelligence. In 2019, by contrast, the significant movements in interest rates in the last quarter of 2018 led to a sharp pivot in monetary policy in January, with rate cuts from both the Fed and the ECB. It is conceivable that movements in bond markets, especially at the long end of the US interest rate curve, are already beginning to drive a policy shift.
Policy is already slightly restrictive
Our expectations regarding monetary policy have evolved this year. The rebound in commodity prices following the war in the Middle East, the sustained rise in CAPEX investment related to artificial intelligence, and a more expansive global fiscal policy have led to our previous forecast of interest rate cuts in 2026 being pushed back to 2027. However, the need for a more restrictive monetary policy appeared —and still appears— unclear. Current official interest rates are already around our estimates of neutral levels in the US and are somewhat restrictive in Europe and the UK, with few reasons justifying further tightening.
Recent macroeconomic data and market developments have confirmed this perspective. For example: labour data, retail sales, the housing market, and inflation in the US were weaker than expected in July; even the Atlanta Fed's GDP indicator has fallen significantly. European data has been more robust, as reflected in the economic surprise indices, which are now the strongest among major economies. However, underlying fragilities persist, as pointed out at the end of July by Fabio Panetta, a member of the ECB's Governing Council. European growth in the second quarter was boosted by Irish accounting, companies' anticipation of energy costs, and VAT cuts in Germany —which are about to be reversed—, and European growth forecasts have systematically proven to be too optimistic, especially in Germany. In this context, it seems unlikely that a second wave of inflation driven by rising oil prices will occur, which would threaten the ECB's exclusive mandate for price stability.
Market expectations regarding official interest rate hikes have also decreased from their peak: between 15 basis points (in the case of the ECB and the Bank of Japan) and 60 bp (UK) for 2026, a year in which the reassessment has been more drastic in both directions. Generally speaking, however, the European Central Bank and the Bank of Japan are expected to raise interest rates this year, by between 65 and 70 bp, followed by the Bank of England and the Federal Reserve, with hikes of around 25 bp each. We disagree.
We anticipate that the next move from most major central banks will be a cut, albeit later than we expected at the beginning of the year, that is, in 2027, once inflation normalises. While we expect the Bank of Japan to tighten its monetary policy, we anticipate a lower terminal rate than currently reflected in market prices.
We also foresee a generally favourable global growth environment, particularly supported by significant investments in fixed capital related to artificial intelligence and adjacent sectors. The trajectory of constant nominal growth and stable or declining global interest rates should be positive for risk markets, especially equities, where the main factors driving returns —profits or cash flows and discount rates— are evolving positively. Historically, as we have seen before, these conditions are not unprecedented.
A potential risk scenario is that markets force central banks to raise rates, which would maintain pressure on long-term bonds. Ultimately, as things stand, we would take advantage of any associated volatility to position ourselves in selective areas that we find favourable. The US, emerging markets in Asia, and Japan are our preferred regions for equities, along with a long exposure to the duration of European (bunds) and UK bonds. We also believe that commodities and covered strategies remain important diversification tools, and that the dollar appears vulnerable.