Central Bank Week: What the Fed, Bank of Canada and ECB Decide Next

For most of the last two years, investors planned around one assumption: interest rates were heading lower. That assumption has now turned. Inflation has picked up again in several major economies, and next week three of the world's most closely watched central banks set policy within three days of each other. For anyone holding bonds, equities, gold or property, and for borrowers whose currencies are pegged to the US dollar, the outcome matters.

The calendar

The Fed: a hold now, a hike later?

The Federal Reserve raised its policy rate by 25 basis points in September, to a range of 3.75% to 4.00%. The question for 28 October is whether it moves again straight away.

Markets and economists mostly say no. In a Reuters poll of 100 economists taken between 16 and 20 October, 94 expected the Fed to hold this month. The same poll found something more striking: all 100 expect a hike in December, up from fewer than half a month earlier. Futures markets tell a similar story, with CME FedWatch pricing roughly 78% to 83% odds of a December increase.

The reason is inflation. US consumer prices rose 3.7% in the year to September, up from 3.4% in August and above the 3.6% forecast. Energy prices rose 5.2% and gasoline 9.1% over the year, reflecting the rally in oil. Core inflation, which strips out food and energy, was steadier at 2.6%.

There is also a calendar wrinkle. The 28 October decision falls six days before the 3 November US midterm elections. Since 1990, the Fed has raised rates within seven days of an election only once, on 2 November 2022. That history is one reason markets lean towards December rather than October.

Canada, Europe and the UK

The Fed is not alone. Markets price about an 80% chance that the Bank of Canada raises rates on 28 October. In the UK, inflation rose to 3.5% in September, and a Bank of England hike from 3.75% on 5 November is widely expected, which would be its first increase since 2023. The European Central Bank meets on 29 October, with investors watching for any sign that it too is leaning towards tighter policy.

When several central banks move in the same direction at once, the effect on global borrowing costs, currencies and asset prices is larger than any single decision.

Why it matters for dollar-pegged economies

Most Gulf currencies are pegged to the US dollar. To keep those pegs stable, their central banks usually mirror changes in the Fed's policy rate. In practice, a Fed decision in Washington feeds through to interbank rates, mortgages and business loans across the region within days.

So when markets price a December Fed hike, borrowers in dollar-pegged economies should read it as a likely move in their own rates too.

What each outcome could mean

If the Fed holds and signals December: this is largely priced in. Attention shifts to the PCE inflation figure on 29 October and to the Fed's language about the path ahead.

If the Fed hikes in October: a surprise would likely push short-term bond yields and the dollar higher, and could weigh on rate-sensitive assets such as growth stocks, property and gold, which pays no interest.

If the Fed sounds less hawkish than expected: bonds could extend their recent rally and pressure on equities could ease, though with inflation at 3.7% that would be a notable shift.

The investor's takeaway

Rate decisions are not events to trade on headlines. They are a reason to review exposure. Questions worth asking now:

1. How sensitive is my portfolio to rates? Long-duration bonds, high-valuation equities and leveraged property all feel rising rates more.
2. What is my borrowing cost doing? Where a currency is pegged to the dollar, floating-rate debt tracks the Fed.
3. Am I relying on one outcome? A portfolio built for a single scenario is a bet, not a plan.

Superfly Capital will cover the decisions as they land next week.

Sources

• Mitrade, citing the Reuters poll of 100 economists and CME FedWatch
• Yahoo Finance, September CPI and election timing
• MarketScreener (Reuters), December hike odds
• investingLive, Bank of Canada odds
• Yahoo Finance UK, UK inflation
• Finance Calendar, ECB decision time