Central Bank Watch: Growth Holds—Inflation Bites

Central banks are shifting toward tighter policy as resilient growth and renewed energy-driven inflation outweigh weaker labor-market signals in several economies.

• The Fed raised its target range by 25 basis points to 3.75%–4.00% in September; with core PCE inflation at 3.0%, payrolls up only 29,000 and unemployment at 4.2%, Franklin Templeton expects an October pause followed by a 25-basis-point hike in December.
• The Bank of Canada held its rate at 2.25%, but Q2 GDP grew 3.3%, headline inflation remained 3.0% in August and inflation excluding gasoline rose to 2.4%, shifting risks toward a December hike and a possible further 75 basis points by July 2027.
• The ECB delivered its second 25-basis-point hike of the year, taking rates to 2.5%; its 2027 forecasts were revised to 1.4% GDP growth and 2.5% HICP inflation, making another December hike likely but further tightening beyond that unlikely as a base case.
• The Bank of England kept Bank Rate at 3.75%, but expects inflation at 3.75% in Q4 and above 4% in Q1; it is therefore likely to hike in November, while its plan to reduce gilt holdings by £46 billion annually through 2034 should ease pressure on long-term term premia.
• Norges Bank returned to its post-pandemic peak of 4.5%, while Asian central banks are also tightening: India has begun raising rates, Korea is expected to do more, and Japan, Australia and New Zealand are expected to hike further; China should pursue targeted, incremental easing.

Takeaway: Investors should prepare for a higher-for-longer policy-rate environment, with renewed tightening favored across many developed and Asian economies, although energy-price normalization, weaker growth or softer labor markets could limit the hiking cycles and eventually prompt rate cuts.