Central bankers across developed economies have long worked in concert, cutting their policy rates in unison when the global economy was threatened by recession and raising rates when inflation took hold.
We saw this joint effort in the zero interest rate settings of the financial crisis and again during the pandemic.
This tacit coordination is what has held the global economy together during the shocks of the past quarter century.
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Now, we expect central banks to act in concert again, this time to raise their policy rates to counter the energy shock and the inflation that is once more taking hold.
In the U.S. and UK, the latest inflation readings have reached 3.4%. In the dollar bloc, inflation in Canada is at 3.0%, Australia is at 3.2% and New Zealand is 4.1%.
In the euro area, Germany has a 2.9% inflation rate, with France at 2.6% and Spain at 4.6%. Italy’s inflation was below 2% throughout 2024 and 2025, only to reach 3.2% after the energy shock.
In addition, short-term yields are rising as inflation concerns proliferate across the international economy.
These inflation rates are substantially higher than the disinflation of prior years and are far higher than the 2% targets of their respective central banks.
For policymakers, inflation distorts and reduces consumer spending, leading to hardship and eventually a recession.
For the financial markets, inflation reduces expected returns on investments, which also leads to a drop in real income, disinvestment and slower growth.
So in today’s environment, what do the financial markets expect the monetary authorities to do?
The money markets
Our preferred metric to estimate the number of rate hikes is the overnight index swap (OIS) market, which is based on the overnight policy rates set by the central banks. The OIS market provides a measure of expectations of central bank policy.
After the inflation shocks of the Iran war, the OIS markets now expect central banks to hike their policy rates at least one time by the end of the year, with an additional rate hike in the U.S.
That would be a synchronized global rate hike as predicted by the OIS market. Furthermore, the OIS market is anticipating additional rate hikes across the board next year.
The bond market
The global bond market is also reacting to the threat of sustained inflation, with 2-year yields at the front end of the yield curve moving higher since the initial attack on Iran on Feb. 27 and more recently in recognition of fuel shortages.
Because of its shorter duration, the 2-year bond is considered a proxy for central banks’ policy rate. For example, the U.S. 2-year bond at 4.8% is 90 basis points above the effective federal funds rate of 3.9%. That difference implies at least three more rate hikes over the next two years.
The takeaway
We expect synchronized action by the central banks among the developed economies, with at least one global rate hike by the end of the year as inflation sets in, and most likely more next year.
That view is also the markets’ consensus, with the OIS money market predicting an across-the-board rate hike in December and additional rate increases next year. In addition, 2-year bond yields are implying additional hikes over the next two years.
We recently published a rate shock model for the U.S. economy to estimate the impact of rising 10-year yields on growth, employment and inflation.
One of the major takeaways was that as long-term yields move well above 5% in the U.S. and much higher elsewhere, central bankers are underestimating what it will take to bring inflation down to the central banks’ 2% target.
Based on the analysis of RSM economists across the international economy—Australia, Canada, the UK and India—that outlook applies to the other major central banks as well.
