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 evaluate the difference between our expectations/rankings and market expectations/rankings.
Key highlights
The Federal Reserve (Fed) and Bank of Canada (BoC) to remain patient, but with conditions: Fed policy is likely to remain on hold unless core inflation proves persistent or accelerates, in which case tightening could resume as early as the fourth quarter. With inflation pass-through limited, core inflation near target, and growth soft but stable, the BoC has little urgency to tighten and is likely to keep rates unchanged through 2026.
Facing inflation uncertainty, Europe’s central banks are responding at different speeds: After hiking in June, the European Central Bank (ECB) is likely to deliver another 25-basis point (bp) hike in September unless inflation surprises meaningfully to the downside. The Bank of England (BoE) is alert to inflation risks but remains reluctant to tighten unless second-round effects become clearer. In the Nordics, Norges Bank has already returned to tightening and is likely to hike again in the third quarter, while the Riksbank is leaning toward a gradual normalization rather than a hiking cycle. The Swiss National Bank (SNB) remains comfortable with inflation dynamics and is likely to keep rates at 0% through 2026–2027, despite some residual market pricing for future tightening.
Asia’s hiking trajectory continues, albeit data-dependent: The tech super cycle has mitigated some risks to growth emanating from the Middle East tensions. Monetary policy will broadly be hawkish across the region with the frequency and extent driven by data. We expect Bank of Korea (BoK) to embark on more hikes, following in the footsteps of the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA). The Bank of Japan (BoJ) is expected to raise rates gradually, with the next in the fourth quarter whereas the Royal Bank of India (RBI) will likely wait till inflation becomes more entrenched to act. China’s two-speed economy and underwhelming fiscal support keep easing expectations alive, with the People’s Bank of China (PBoC) likely to deliver limited monetary support in the second half of the year.
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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. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
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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