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The Franklin Templeton Fixed Income (FTFI) Central Bank Watch is a qualitative assessment of the central banks for the Group of Ten (G10) nations plus three additional countries (China, India and South Korea). Each central bank is scored on three parameters: Inflation Outlook Perception, Quantitative Easing/Liquidity Management Programs, and Interest Rate Forward Guidance. Each parameter can be scored from a range with a minimum of –2 (dovish) and a maximum of +2 (hawkish). The methodology for scoring compares the latest monetary policy statement/press statements with prior ones to see how the language and tone regarding each of these parameters may have changed over time. The scores are ultimately aggregated for each central bank, with a final FTFI score ranking each from –6 (for most dovish) to +6 (for most hawkish). We also provide our one-year ahead policy rate expectations and compare our rankings and expectations with market implied policy rates to eval- uate how the difference between our expectations/rankings and market expectations/rankings.

Key highlights:

Measured easing in North America: In September, the Federal Reserve (Fed) resumed easing, citing rising downside risks to the labor market. Although the Federal Open Market Committee (FOMC)’s economic projections known as the “dot plot” turned more dovish, an evenly split Committee on further easing and hawkish revisions to economic projections do not suggest a major dovish recalibration is afoot at the Fed. In Canada, damage from tariffs led the Bank of Canada to cut rates in September. We expect limited easing going forward given that the BoC is approaching the lower end of its neutral range estimate.

Most central banks in Europe are pausing rate changes: With trade policy uncertainty dissipating (for now), risks to growth are now seen as more balanced, and most central banks in Europe have ended or are nearing the end of their easing cycles. The European Central Bank (ECB) will remain on hold unless data meaningfully disappoint while the Riksbank delivered one last hawkish cut. Norges Bank signaled very slow rate cuts after a delayed start, and the Swiss National Bank (SNB) put a high bar to cut back into negative territory. The Bank of England remains hesitant to ease further and seeks additional disinflationary evidence.

More watchful easing for Asia-Pacific: A more subdued growth trajectory lies ahead for Asia Pacific as tariff-related frontloading in exports eases and technology related demand stabilizes. However, central banks in the region will likely be more prudent in easing with some fiscal support coming in. We expect one more rate cut in South Korea and India, likely by early 2026, with data-dependency a key factor for more cuts. We echo a similar sentiment in New Zealand as the Reserve Bank of New Zealand turns its full focus on growth. The Reserve Bank of Australia (RBA) will likely also be pragmatic about any future cuts a amid a resilient economy. The Bank of Japan will likely progress on gradual policy normalization despite a possible new Prime Minister, with the next move later this month.

Download the PDF to see our latest thoughts on global central bank policy.

WHAT ARE THE RISKS

All investments involve risks, including possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.

The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.

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