FED, BoJ, BoE - Overview of Institutional Forecasts

Week of three central banks: what ING and MUFG think before the Fed, Bank of England, and Bank of Japan decisions

This week will test markets three times in a row: on Wednesday, July 29, the US Federal Reserve will announce its decision; on Thursday, July 30, the Bank of England; and on Friday, July 31, the Bank of Japan. Two influential research divisions – ING and MUFG – diverge on the details, though their base scenario is similar: all three banks are most likely to keep rates unchanged. Discrepancies emerge when discussing risks, voting, and the subsequent policy trajectory.

The Fed: a rare moment of true uncertainty

According to ING, the upcoming FOMC meeting is notable because a significant portion of observers may, for the first time in a long while, get an unexpected outcome. The bank's analysts estimate the odds of maintaining the rate at approximately 60:40 in favor of a pause. Arguments for an unchanged decision are linked to the stabilization of inflation indicators in June, a temporary easing of tensions around Iran, and signs of weakness in the US economy outside the technology sector — as well as the fact that working groups are currently reviewing the functioning of the Fed itself, making a pause a logical step.

At the same time, ING does not rule out a "preventive" rate hike – a typical central bank reaction to inflation accelerating beyond target levels. According to the bank's observations, the jump in long-term bond yields to new local highs indicates some market concern, although it is primarily related to rising real rates. A 25 basis point hike, analysts believe, would strengthen the reputation of Fed Chairman Kevin Warsh as a proponent of price stability.

ING's base scenario is still a pause: inflation expectations appear sufficiently contained, and the shape of the yield curve (particularly the "expensive" five-year segment relative to the curve) is atypical for the start of a hiking cycle. If the Fed does hike rates – now or at the next meeting – the curve structure suggests that this hike would likely have to be reversed within the next 12 months.

MUFG views this meeting from a slightly different angle. In its weekly review, the bank assessed the probability of a Fed rate hike as relatively low and expected the FOMC meeting to take place against a backdrop of significant oil price increases, driven by a potential escalation of the conflict around Iran, though a July rate hike itself is unlikely. In its monthly currency outlook, MUFG notes that among the three central banks meeting this week, the market pricing for a hike is highest for the Fed, which analysts attribute to the recent hawkish pivot and leadership change at the Fed, including Kevin Warsh's first press conference, which also sounded quite hawkish. However, MUFG considers such market pricing internally contradictory – it simultaneously factors in a small rate hike and a subsequent cut already in 2027. The bank's own base scenario: the threshold for a US rate hike is high, especially after the recent drop in oil prices, so the Fed is most likely to pause until the end of 2026, and then implement two rate cuts to reach a neutral level around 3.00%.

Bank of England: a pause they try not to call a surrender

Regarding the Bank of England, both banks are almost unanimous in their forecast for the decision itself – the rate of 3.75% will remain unchanged – but with different nuances in their reasoning.

ING expects a repeat of the 7-2 vote, with Huw Pill and Megan Greene again arguing for a hike, and the tone of the statement remaining cautious but with a "hawkish" tilt – something akin to a readiness to act if needed. According to the bank's assessment, domestic inflation data remains significantly below the regulator's April forecasts, wage growth is subdued, and there are almost no signs of secondary effects in surveys or expectations. At the same time, ING admits that the renewed tensions around Iran and rising energy prices have somewhat shaken confidence in this scenario: if dynamics in the energy market push expected inflation to around 4% and above, arguments for an "insurance" hike may return. In ING's base scenario, peak inflation is expected in the autumn at around 3.5%. Analysts consider the September meeting potentially "live" if volatility in energy markets persists, although they themselves assume that the committee may wait until November or December – to gain more clarity on 2027 wage agreements and the political course of the new prime minister.

MUFG places even sharper emphasis. The bank's senior economist, Henry Cook, has abandoned his previous forecast that the Bank of England would implement a preemptive rate hike, following the example of the ECB. According to him, inflation in Britain has been lower than expected for three consecutive times, and the labor market shows many signs of weakness. MUFG points out that the regulator's April forecast for peak inflation at the end of 2026 (around 3.6-3.7%) has already been revised in June to a level slightly above 3.25%, and oil futures continue to align with the mildest of the Bank of England's three scenarios, while the gas price curve is closer to the middle scenario. In its monthly currency outlook, MUFG also confirms the expected base outcome of the meeting – a repeat of the 7-2 vote with Pill and Greene in the minority advocating for a hike – and draws attention to updated quarterly forecasts for peak inflation and the speed of return to target.

Bank of Japan: a pause without a pause in rhetoric

Here, the positions of both banks also align in their basic forecast – the regulator will leave the rate at 1.00% after the June 25 basis point hike – but they assess the risks of an accelerated cycle differently.

ING notes that since the June meeting, economic data has looked quite confident: strong retail sales and an optimistic Tankan for the second quarter, where business sentiment returned to 2018 levels. The Bank of Japan will most likely keep its GDP forecasts largely unchanged and continue to emphasize stable inflation around 2% in the long term, despite core inflation (excluding fresh food and energy) having decreased from last year's peak of 3.6% to 2.1% in May. At the same time, ING observes that business inflation expectations from Tankan for five years ahead are 2.6% – noticeably higher than the regulator's target, and import prices are growing fastest since 2022 amidst the weakest yen since the 1980s. Sources cited by ING hint that part of the board may prefer a September or October hike instead of the usual semi-annual cycle with the next step in December. A market reaction, according to ING, is unlikely unless Governor Ueda hints at an acceleration of this cycle; the dollar/yen pair itself, according to the bank's forecasts, will remain around 163–164 ahead of the meeting, with a risk of moving towards 165 if there are no interventions.

MUFG formulates the logic somewhat differently. In its weekly currency outlook, the bank expected the Bank of Japan to adopt a more hawkish communication on Friday to confirm current market rates – this is needed to avoid an intensification of yen selling and increased volatility, although a rate hike itself is unlikely this time. MUFG notes that the event will largely depend on what happens earlier that week: a tougher-than-expected FOMC tone and a further rise in energy prices will give the regulator more room for hawkish rhetoric. In its monthly review, the bank goes even further and directly calls a September rate hike a possible scenario underestimated by the market, pointing to pressure from the Takaichi government, which wants restraint from the central bank, as well as a massive government investment plan of 370 trillion yen, which undermines bond investor confidence.

This material was prepared based on analytical reviews from ING and MUFG Research; selected MUFG assessments are also cited from publications by Reuters, Cyprus Mail, Manila Times, KFGO, and Eastern Eye.