In this episode:
- Global Monetary Policy – Central Banks Hold Steady at Neutral
- The Bank of England’s Balancing Act – Fiscal Tightening Ahead
- The Fed’s Dilemma – Diverging Views and a K-Shaped Economy
Global Monetary Policy – Central Banks Hold Steady at Neutral
- Global central banks are largely pausing around neutral policy settings after earlier adjustments.
- The ECB and Bank of Canada signalled comfort with current rates, while Japan remains well below neutral.
- Upcoming decisions across major and emerging markets will reinforce policy stability amid global uncertainty.
The Bank of England’s Balancing Act – Fiscal Tightening Ahead
- UK data shows softening domestic demand despite isolated strength in retail and manufacturing.
- The Bank of England faces two-sided risks: persistent wage pressures versus slowing growth.
- Delayed fiscal tightening may exacerbate the slowdown, implying lower rates ahead and communication challenges for the Bank
The Fed’s Dilemma – Diverging Views and a K-Shaped Economy
- The Fed’s 25-bp cut was expected, but guidance highlighted uncertainty over future easing.
- Divisions on the FOMC reflect differing views of the neutral rate and inflation risks.
- A K-shaped US economy, with strength at the top and weakness at the bottom, complicates policy calibration
Transcript (AI Generated)
Matt Jones
Welcome to "The Long & Short of the Week Ahead", a production of Eurizon SLJ Capital that takes a look at the macro-economic themes of the week ahead and has been recorded for professional investors.
My name is Matt, Head of Distribution for Eurizon SLJ Capital, and I'm joined by Neil Staines, Senior Portfolio Manager.
Welcome back, Neil. It's great to have you here with us again.
Neil Staines
Thank you very much Matt. It's great to be here.
Matt Jones
So it’s been a big week for developed markets and central banks—and leaving the Fed to one side for a moment—how are we thinking about monetary policy globally? And what are we watching for next week?
Neil Staines
Yeah, thanks very much, Matt. It has, as you say, been a huge week for central banks, with the ECB, Bank of Canada, and Bank of Japan to name but a few, and I’m sure we’ll come back to the FOMC at some point. Now, we discussed this further in this week’s blog, but we have a few thoughts on the ECB.
They were very clear, having reached the neutral policy rate in June, that they’re comfortable with the current monetary settings. On the positive side: resilient labour markets, solid private-sector balance sheets, and the effects of past rate cuts, not to mention Europe-wide defence and infrastructure spending from fiscal expansion.
That comes against global trade and geopolitical uncertainties, making that neutral rate a good place to sit and wait for the moment. In Canada, the Bank of Canada cut 25 basis points to 2.25% and indicated that they are also content with the current setting if the economy evolves as forecast. Canada is now near the lower, or more stimulative, end of the neutral rate estimates.
The Bank of Japan left rates on hold with two hawkish dissents at 0.5%, some way off estimates of neutral, which we see somewhere around 1.5% to 2%. We expect that as the new Prime Minister’s stimulative manifesto gets into action, the Bank of Japan will move towards that neutral rate, with rate hikes likely to come sometime around December or even into January.
Next week, the focus remains on global central bank action, with the RBA expected unchanged at 3.6%, with inflation higher but growth continuing to disappoint. The Riksbank is expected unchanged at 1.75% after a significant cutting cycle to support Swedish growth. Norges Bank is expected to remain unchanged at 4%, but they are likely to signal that we are going to get significant rate cuts in 2026.
We also get central bank action from Brazil, Poland, Malaysia, the Czech Republic, and Mexico, keeping a huge focus on central banks next week. And, of course, there’s the Bank of England.
Europe is much more of a focus than it has been recently, nonetheless.
Matt Jones
Indeed, a big week for the UK and the Bank of England next week. How are we thinking about the bank rate and the UK economy in what’s an important month for fiscal policy?
Neil Staines
Absolutely. It’s a great question. Recent data in the UK has shown increasing signs of weakness of late. Whilst retail sales and, to some extent, manufacturing PMI have surprised to the top side, the most recent CPI and employment reports have shown signs of faltering domestic demand.
Like many global central banks at the moment, the Bank of England faces two-sided risks, with services wage growth likely still too high for comfort, countering the dovish impact of weakness elsewhere. However, the current bank rate is significantly above most estimates of the neutral policy rate, at around 3%, and hence, the bias remains to the downside for the Bank of England.
While the Bank of England has historically placed less emphasis on market pricing, it is telling that markets price only seven basis points for this week’s action. The reason likely being, as we’ve mentioned a number of times before, that while November is a Monetary Policy Report month—i.e., it comes with updated economic projections—the delay of the fiscal event, or the budget, until November 26th means that the imminent and significant fiscal tightening, in our view, will not be incorporated into the Bank of England’s growth and inflation projections this time out.
Regular listeners will know that we continue to see this as the Bank of England getting behind the curve. A sharp fiscal tightening at the end of the month, just as the economy is starting to slow, means that a significantly lower bank rate will come in 2026. It’s a difficult communications challenge next week for the Bank of England.
Matt Jones
Absolutely. And now, to bring us back to the US, what were our takeaways from this week’s FOMC meeting, and how does that affect our expectations going forward?
Neil Staines
Absolutely—another very important question. The Fed cut rates 25 basis points to a 3.75–4% target range this week and formally announced the end of its balance sheet runoff on December 1st. There was, however, one dissent for a 50-basis-point cut and one dissent for unchanged policy, just highlighting divergence on the committee.
At the headline level, these were broadly as expected in terms of the policy actions and brought little market reaction. However, in the press conference, when Powell referenced future policy action, the picture became a little more foggy. He was clear that, with upside risks to inflation in the near term from tariffs and downside risks to the labour market, there is no risk-free path for policy.
Furthermore, he was explicit that the case for a rate cut in December was not a foregone conclusion. In fact, far from it. This is important because, going into the meeting, the market had fully priced a 25-basis-point cut in November, another in December, and a further 70 basis points of cuts through 2026.
The conflict lies, in many respects, in the debate around the neutral rate. After around 150 basis points of rate cuts from the 2023–2024 peak, some on the committee view the current policy rate as at or near neutral, although there are clearly a wide distribution of estimates in that regard.
Thus, with heightened uncertainty, those who assume us to be near that neutral rate favour halting or even slowing the current pace of rate cuts. Powell emphasised the strongly differing views on the committee, and this remains a key focal point for markets going forward.
The other point we wanted to make in relation to policy uncertainty is the K-shaped economic trajectory in the US at the moment, with the low end deteriorating and the top end seemingly accelerating. This can be seen in the “Mag 7” versus consumer-focused stocks. It can also be seen among age-range breakdowns when you look at economic activity in the US.
Certainly, divergent sectors of the economy, stock market, and monetary policy targets make the Fed’s job very complex at the current juncture. Regular listeners will be aware of our view that, while our core macro views remain, given the complexities and uncertainties of the current environment, global asset volatility prices remain far too low.
Matt Jones
Fantastic. Thank you for joining us once again and outlining your thoughts on the week ahead. I look forward to catching up with you again next time.
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