Our latest views on the major central banks

Our take on what could be next for the Federal Reserve, the European Central Bank and the Bank of England over the coming months.

Federal Reserve

A more hawkish-than-anticipated June FOMC meeting fuelled market expectations for a Federal Reserve rate hike this year. But oil prices are down sharply from their peaks (despite this week's uptick) and if renewed tensions in the Middle East do not escalate further, the inflation backdrop should improve markedly over the coming months. Slowing shelter inflation, which has a 35% weighting within the consumer price index, should also help lower the headline rate given stagnant home prices and private sector surveys reporting outright rent falls in a growing number of areas.

The lacklustre jobs market means wage pressures are subdued, while the one-off step increase in costs caused by tariffs will start to drop out of the annual inflation calculation through the second half of this year. Refunds of the “Liberation Day” IEEPA tariffs will further help lower corporate costs.

While in June, nine FOMC members felt they would need to raise interest rates this year, it is important to remember that nine others did not. We agree with that second group. A lack of vigour in the jobs market and the prospect of lower inflation means a lengthy pause is our call before eventual rate cuts in mid to late 2027 bring the policy rate down to a neutral level of around 3.25%.

European Central Bank

The drop in oil prices in June may have led some ECB officials to question whether the June rate hike was really necessary. Historically, it is rare for the ECB to embark on a new tightening cycle ahead of other major central banks. It would be a bittersweet irony if this display of global leadership were eventually judged to have been a mistake. However, the recent rebound in oil prices amid renewed Middle East tensions serves as a reminder that the inflation outlook remains far from settled.

At the ECB conference in Sintra, President Christine Lagarde reiterated that the June hike was not an insurance move. Rather, it reflected an outlook of persistently elevated headline and core inflation, with ECB forecasts showing headline inflation above 2% in both 2027 and 2028 and core inflation at 2.7% in early 2027.

The decline in energy prices seen in June increased the likelihood that future forecasts could show headline inflation falling below 2% in 2027. Would such a scenario prevent the ECB from delivering a second rate hike this summer? Judging from Lagarde's recent remarks, as well as those of other policymakers, the answer appears to be no.

In fact, the ECB still looks set to hike again. As long as core inflation forecasts are not revised materially lower, there appears to be little standing in the way of another rate hike. Whether a second increase is really what the eurozone economy needs remains a different story.

Bank of England

With oil prices down from earlier peaks, a Bank of England rate hike now looks highly unlikely. Financial markets are still pricing a single rate rise over the next 12 months. But inflation is now unlikely to go much above 3% this summer and is likely to be much closer to 2% by next summer. That’s helped by ever-lower wage growth – now at 2.9% in the private sector, down from over 6% 18 months ago, and biased even lower in the short-term. That goes hand in hand with further weakness in the jobs market.

That all points to rate cuts in 2027 – something markets aren’t currently pricing. But a lot depends on the politics and what Makerfield MP Andy Burnham – who is highly likely to become prime minister this month – opts for at the Autumn Budget.

For now, we expect two cuts in 2027, in 2Q and 4Q.

Read the original analysis here