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
The Reserve Bank of Australia (RBA) will likely pull forward a 25‑basis‑point rate hike to next week, completing the reversal of last year’s 75‑point easing cycle.
Soaring oil prices have added another layer of inflation risk to the Bank’s outlook, already strained by hotter‑than-expected activity and a tight labor market, with headline inflation at 3.8% and underlying inflation 3.4% in Q4 2025.
The RBA board’s language shift last meeting, from confidence in disinflation to concern about renewed price momentum spurred a higher cash rate path priced by markets.
It was solidified by Australia’s “Big Four” commercial banks all pivoting, to a March hike call from May, reflecting that the RBA wanted expectations pulled forward.
Validation
Bloomberg 3/17/26
Australia’s central bank raised its key
interest rate for a second straight meeting on Tuesday, stepping
up its battle against stubborn inflation as rising energy costs
from the widening war in Iran threaten to intensify price
pressures.
The Reserve Bank’s nine-member policy committee split five-
to-four in favor of raising the cash rate to 4.1% from 3.85%.
This was the first back-to-back hike since mid-2023 and reverses
two of the three cuts delivered last year.
More controversial, we have sensed and written that there may be more than meets the eye to the speculation, including by senior military analysts like retired Lt. General Keith Kellogg, that US special forces may take over the southern strip of Iranian territory overlooking Hormuz and potentially even Iran’s Kharg Island terminal.
We believe the extreme degradation of Iranian defensive capabilities has left that as a realistic option, even as it, in essence, reflects doubling down on the conflict and all the political ramifications that come with it.
This all clearly increases the risk of further incidents, but results in a far more secure eventual outcome, and definable time frame.
Bloomberg 3/14/26
The US struck military sites on Kharg
Island, from which Iran exports almost all its oil, for the
first time overnight, upping the ante in a Middle East war
that’s raged for more than two weeks and shows little sign of
easing.
President Donald Trump said military facilities on the
Persian Gulf island had been “obliterated,” adding that he chose
not to hit oil infrastructure “for reasons of decency.” He
threatened to do just that should Iran “do anything to interfere
with the Free and Safe Passage of Ships through the Strait of
Hormuz.”
Bottom Line: The ECB will remain on hold while assessing the magnitude and durability of the impact US-Israeli strikes on Iran have on energy prices. Traders are hearkening to former ECB President Jean-Claude Trichet’s use of the term “vigilance” that was followed by a policy error rate hike, but this ECB is not about to hike rates if and until there is clear evidence of the need to do so. The length and depth of the crisis, and broader economic backdrop, will determine whether the GC can look through the current upheaval. With the hawks, rightly, having put an end to the rate cut cycle at 2%, and inflation at target, ECB officials believe policy is appropriate. While we agree with ECB officials that it will need to be vigilant to potential changes in the medium-term inflation outlook, these will need to be clear and non-trivial to elicit a rate hike. Our call is for no hike through 2026.
Bloomberg 3/10/26
European bonds rebounded on Tuesday as traders seized on a drop in energy prices to dial back the extreme moves seen at the start of the week.
Italian bonds led the recovery in the euro area as 10-year yields slid five basis points to 3.56%. Markets now price fewer than 25 basis points of monetary tightening from the European Central Bank, compared with more than a half percentage point at one stage on Monday.
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.