Weekly focus – Central banks to hike but not next week

Financial markets have seen somewhat increasing volatility this week, as worries remain regarding public finances in France, the oil price continues to increase, and some doubts are creeping in about the sustainability of the AI-related investment boom. Data centre construction has rapidly become a major driver of global demand growth this year, and increasingly it depends on debt financing. Some borrowers have seen increasing borrowing costs, and it has become more expensive for investors to insure against defaults.

Next week is in principle an important one for financial markets with interest rate decisions from the US Fed, the ECB and the Bank of Japan. However, we and markets see it as most likely that all three central banks will leave interest rates unchanged this time, before resuming rate hikes later this year. For the Fed, committee members clearly indicated last month that the September rate hike was unlikely to be the last one, but they also mostly signalled only one more hike in 2026 and so it would make sense to wait until the December meeting. Markets are pricing approximately 20% chance of a rate hike on Wednesday so there is potential for a market reaction even if the result is as forecasted. See also our Research US - Fed Preview: On hold in October, hiking resumes later, 22 October.

Listening to ECB President Christine Lagarde at the press conference after the September rate hike, it seemed that another hike was imminent, given the continued rise in energy prices. However, since then communication from the governing board members have moderated that message, and neither we nor markets see a rate hike as likely next week. Data continues to show very little effect of higher energy prices on core inflation, which dampens the case for higher rates. On the other hand, economic growth seems resilient. PMI data for October was slightly weaker overall but still indicate decent growth and moderate inflation pressure. We will learn more on both sides on Friday when we get October inflation data for the big euro area economies as well as Q3 GDP data for the whole area. See also ECB Preview - October pause; MRR in focus, 20 October.

In Japan, core inflation reached 2.4% in September and October PMIs were robust. Japan's largest trade union, Rango, is urging member unions to go for 6% wage increases in next year's negotiations. The case remains in place for more rate hikes, but given its cautious approach, we expect the Bank of Japan to wait for its December meeting before moving.

Next week, we will also have the UK government's 2027 budget which could gather some attention. UK inflation came in at 3.5% y/y with services inflation at 3.7%, a bit above expectations. Inflation concerns coupled with stronger growth could well trigger a hike to the UK's already high interest rates in November.

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