SGH Macro Advisors produces concise, forward-looking proprietary reports on the major central banks and on key economic and policy developments that drive global bond, equity, and currency markets.
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Highlights
Bottom Line: Uncertainty has risen sharply in the euro area, while a stronger euro threatens to durably lower inflation below projections. Some officials will stress this could dent consumer confidence and business investment, interrupting the stronger growth and on-target inflation path. As long as these factors do not impact hard economic data most officials will continue to convey that solid growth and sticky inflation trending to 2% will keep the ECB in its current place. Communications will, however, put greater emphasis now on “optionality” and data-dependence.
Bloomberg 2/5/26
The European Central Bank kept interest rates unchanged as officials assess the economic toll of a rally in the euro and renewed trade unpredictability.
The deposit rate was left at 2% on Thursday — as predicted by all economists in a Bloomberg survey. The ECB didn’t offer guidance on future steps, reiterating that incoming data will steer decision-making.
“The economy remains resilient in a challenging global environment,” it said in a statement. “At the same time, the outlook is still uncertain, owing particularly to ongoing global trade policy uncertainty and geopolitical tensions.”
Economic data and surveys released this week validate the consensus within the European Central Bank’s Governing Council (GC) that 2% remains the appropriate benchmark deposit rate, and that setting is likely to stay in place for the foreseeable future.
What had appeared over the summer to be a weak macroeconomic balance has gradually strengthened, convincing most officials that the economy does not warrant monetary policy intervention.
AFP 2/5/26
The European Central Bank kept interest rates unchanged Thursday for a fifth time in a row, saying it expected inflation to stabilise at its two-percent target “in the medium term”.
December’s upside UK inflation surprise does little to derail what remains a clear easing trajectory for the Bank of England (BOE), as underlying disinflation, rising labor market slack, and a weakening growth backdrop continue to exert downward pressure on policy.
We still think policymakers will opt to skip cutting rates in February as they seek further confirmation on services inflation, with March looking more like a point when improving inflation dynamics and weakening labor data align.
Against this backdrop, we reiterate our rate call from late last year to expect cuts in March and July, and potentially another 25 bps cut in the second half of the year — so at least 50 and maybe 75 basis points of additional easing (see SGH 12/18/25; “BOE: Bailey Tips Vote, Easing Resumes”).
Bloomberg. 2/5/26
The Bank of England came within a vote of cutting interest rates and predicted inflation will fall below its target, a closer-than-expected decision that revived hopes of a move next month.
Governor Andrew Bailey was once again the swing voter in a 5-4 decision to leave rates unchanged at 3.75%, choosing to hold policy having cut at the last meeting in December. Bailey said in a statement that “there should be scope for some further reduction in bank rate this year.”
In updated forecasts, the BOE predicted inflation will be at its 2% target in April and warned of slowing growth and rising unemployment.
The Monetary Policy Committee’s decision was far more dovish than anticipated, with the close call not reflected in market pricing before the meeting for a near-zero chance of a reduction. Earlier Thursday, the pound dipped and gilt yields rose as speculation mounted over the future of Prime Minister Keir Starmer.
The pound extended losses, falling as much as 0.8% to $1.3550, and traders ramped up bets on rate cuts to price more than a 50% chance of a quarter-point move in March. They expect 45 basis points of reductions in total by year-end.
The RBA is now positioned to tighten rates next week, with a fourth quarter inflation data showing persistent underlying inflation and labor market tightness leaving little room for patience. The Bank hopes a modest 25 bps February hike will signal the Board’s intent to reinforce its inflation fighting credibility and contain upside risks, even as it maintains flexibility to pause thereafter. Policymakers are clearly focused on sustained disinflation, not temporary dips, and are prepared to act if inflation does not return toward the 2–3 % target.
Bloomberg 2/3/26
Australia’s central bank raised its key interest rate Tuesday after judging inflation pressures were persistent enough to warrant renewed restraint but not strong enough to signal further hikes are possible.
While it warned in its statement that “inflation is likely to remain above target for some time,” Governor Michele Bullock in a briefing avoided any hints that further tightening was possible.
“I don’t know if it’s in a cycle, certainly it’s an adjustment,” she said when asked if the bank was in a new tightening phase. “We are in a position where we think we might be around neutral.” “It’s not clear one way or the other,” she said.
Meanwhile, the Fed is positioned to hold rates steady for the foreseeable future as it assesses the impact of last year’s 75bp of rate cuts. Most participants anticipate holding policy steady through the end of Chair Jerome’s Powell term as they await key inflation data in the first half of the year. If inflation falls as anticipated while the labor market holds steady in the current equilibrium of weak demand but steady unemployment, the Fed will likely edge rates closer to neutral in the second half of the year
Wall Street Journal — WASHINGTON 1/28/26
The Federal Reserve entered a new holding pattern on interest rates Wednesday and signaled little urgency to resume cuts after contentious reductions at officials’ three previous meetings.
The decision to hold the benchmark federal-funds rate steady in a range between 3.5% and 3.75% was approved on a 10-2 vote.
Officials made fairly modest changes to the post-meeting statement explaining their decision, retaining language that typically has signaled openness to further moves without suggesting any hurry to make them.
“We’re not trying to articulate a test for when to next cut or whether to cut at the next meeting,” Fed Chair Jerome Powell said at a news conference. “What we’re saying is we’re well positioned as we make decisions, meeting by meeting.”
While the Fed is biased toward lower rates given the ongoing weakness in hiring, it anticipates that last year’s insurance cuts are enough to hold the unemployment rate in check and provide time to see if inflation falls as expected. The December employment report reinforced that story.
Washington Post 1/28/26
The Federal Reserve kept interest rates unchanged Wednesday, hitting the pause button at its first meeting this year despite pressure from President Donald Trump to slash rates further.
With job growth still decelerating but the economy showing few signs of distress, policymakers now say they can afford to be patient as they watch whether inflation continues to cool.
With policy rates now within the upper end of estimates of neutral, the Fed looks set to hold rates steady for an indefinite period of time. To be sure, most FOMC participants anticipate rates will need to fall further as inflation drops toward 2%, but the labor market offers no reason for urgent rate cuts.
Axios 1/28/26
The Federal Reserve left interest rates unchanged on Wednesday, noting “solid” growth and a stabilizing job market, as the central bank navigates a delicate economic and political moment.
The big picture: The central bank’s policy committee took a breather after three consecutive rate cuts in the final meetings of last year, showing greater confidence in the economy. But they gave no hints as to when they may adjust borrowing costs again.
The Fed will leave interest rates unchanged this week. The December SEP revealed that FOMC participants remain biased in favor of modest rate cuts this year if inflation falls as anticipated, but there is no urgency for cuts given the Fed’s 75bps of insurance last year amidst solid economic growth, a labor market that appears to be stabilizing, and concerns that inflation will firm in the first quarter.
All eyes are on the vote count. Governor Stephan Miran will likely dissent in favor of another rate cut. Governors Chris Waller and Michelle Bowman are wildcard votes who in a pre-Trump world likely would not dissent. Bowman sounded a very dovish note in her latest speech. Still, she argued the Fed should “remain ready” to cut rates, as if she would vote for a rate cut if the consensus leaned that way but not like she was pounding the table for a cut. Waller anticipates further easing to bring policy closer to neutral if inflation falls but with growth strong and a stable labor market there is no urgent need to cut rates. Waller, however, remains in the running for Fed Chair, and Trump may take notice of a failure to dissent.
Bloomberg 1/28/26
Federal Reserve officials left interest rates unchanged and pointed to improvements in the US economy as they signaled a more cautious approach to potential future adjustments.
In a post-meeting statement, policymakers said “job gains have remained low, and the unemployment rate has shown some signs of stabilization.” Officials also dropped language pointing to increased downside risks to employment that had appeared in the three previous statements.
Wall Street Journal 1/28/26
Two Fed governors — both appointed by President Trump — dissented against the decision and favored a quarter-point rate cut. The Fed’s 12-person rate-setting committee includes seven presidentially-appointed governors and five regional bank presidents who aren’t political appointees.
Powell’s term as chair ends in May, and Trump’s advisers have said he is close to naming a successor. Governor Christopher Waller, one of four finalists, opposed Wednesday’s decision. Analysts had said casting a dissenting vote may have been a precondition for keeping his long-shot candidacy viable.
Governor Stephen Miran also dissented. Since Trump named him to fill a short-term vacancy on the Fed’s board last summer, he has dissented at all four policy meetings he has attended in favor of lower rates.
The Bank of Canada (BOC) enters its January 28 policy meeting having parked its policy rate at 2.25%, near the lower end of its estimated neutral range, with guidance that will firmly push back against speculation about rate hikes until downside risks, including those associated with trade, abate.
Crucially, sustained trade tension between the US and Canada, particularly if Canada advances a China deal and the US responds with punitive tariffs, would lock out any prospect of rate hikes this year and re-center the policy debate on downside risks.
In that environment, easing would become materially more likely than tightening, even if the Bank initially opts to stay on hold.
Dow Jones OTTAWA 1/28/26
The Bank of Canada on Wednesday kept its policy rate unchanged at 2.25% in a second-consecutive decision, and warned the level of uncertainty stemming from U.S. trade policy and geopolitical risks has ramped up.
The consensus among senior officials “was that elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate,” Gov. Tiff Macklem said. Prior to Wednesday, most economists surveyed by the Journal predicted the central bank would hold the policy rate steady through 2026.
Macklem said U.S. trade policy continued to disrupt the domestic economy. Central-bank officials project that economic growth stalled in the fourth quarter, after a surprise jump in the previous quarter buoyed by net trade.