- G3: While the Fed kept rates unchanged at the first Warsh-led meeting, the dot plot was hawkish and consistent with the sizable increase in inflation projections; we expect another 25 bps BOJ hike by end-2026 and mid-2027, with Middle East de-escalation and continued AI investment cycle strength supporting further policy normalisation
- China: Industrial activity strengthened on resilient external trade; domestic consumption and investment remained weak; the RMB2tn AI infrastructure plan should act as a catalyst for future FAI growth
- South Korea: We add another 25 bps hike in 4Q26 to our forecast, with inflation expected to remain elevated for an extended period despite lower oil prices
- ASEAN-6: Moderation in currency depreciation and reduced inflation concerns following the Middle East interim deal should ease central banks’ aggressive monetary policy moves
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G3: Fed’s hawkish jolt; BOJ to continue policy normalisation. While the Fed kept rates unchanged, as expected at the first Warsh-led meeting, the dot plot was hawkish (nine members saw the need for one or more hikes, pushing the median projection to 3.8 for this year). This is consistent with the sizable increase in core PCE inflation projection to 3.3% (2.7% previously) and 2.5% (2.2% previously) for 2026 and 2027, respectively. Below, we lay out some observations: First, forward guidance is greatly diminished. Signs of this are already apparent from the much shorter FOMC statement and Warsh’s refusal to submit a projection in the dot plot. Second, sweeping changes to how the Fed operates could be announced by the end of the year. Several task forces have been formed to examine communications, the balance sheet, data collection, AI/jobs/productivity, and the inflation framework. These broadly echo some of his comments, including a preference for less communication, a smaller Fed balance sheet, and perhaps a tweak in the preferred measure of inflation (from the current core PCE to some form of trimmed mean inflation). Following the meeting, the futures market is bringing forward its expectations for the next potential Fed hike to Sep 2026.
Meanwhile, the Bank of Japan (BOJ) raised the overnight call rate by 25 bps to 1.00% at its June policy meeting, as expected. Deputy Governor Uchida, who chaired the post-meeting press conference in Governor Ueda’s absence, adopted a cautious tone and avoided delivering any policy surprises. The meeting offered limited guidance on the future policy path, including the pace of further rate hikes and the eventual terminal rate. From a fundamental perspective, the recent easing of Middle East tensions, together with continued strength in the AI investment cycle, has reduced stagflation risks for Japan’s economy and reinforced the reflation narrative. This strengthens the case for further policy normalisation over the coming quarters. The swap market is currently pricing in a c.70% probability of 25 bps rate hikes every six months, implying a policy rate of 1.25% by Dec 2026 and 1.50% by Jun 2027. This trajectory is consistent with the midpoint of the BOJ’s estimated neutral rate range of 1.0-2.5%. We now also expect the policy rate to rise to 1.25% by end-2026 and to 1.50% by mid-2027.
The European Central Bank (ECB) raised the deposit facility rate by 25 bps to 2.25%, marking its first hike in nearly three years. President Lagarde noted the build-up of inflationary pressures and warned of the risk that they could become more broad-based. Baseline ECB projections for GDP growth were tempered, while inflation was revised up. Growth in 2026 is projected at 0.8% y/y before improving to 1.2% in 2027. Headline inflation is set to peak at 3% this year before cooling to 2.3% in 2027. Core inflation is expected to stay above target in 2026 and 2027 at 2.5% before easing to 2.2% in 2028. While officials did not commit to a future course of action, the ‘insurance’ hike was intended to stay on top of price developments, rather than fall behind the curve, in the event the Middle East conflict spills over into 2H26. We maintain our call for another 25 bps hike in 3Q26, with uncertainty surrounding the trajectory of the Middle East conflict likely to keep the policy decision finely balanced between a pause and a modest rate hike.
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