One Global Shock, Different Rate Paths

The global energy shock will produce divergent rate paths because central banks face different inflation sources, starting points and financial conditions.

• The Fed views its response as a recalibration against persistent inflation and second-round effects rather than an attempt to suppress demand; Morgan Stanley expects two more hikes, totaling 75 basis points, by March next year.
• The ECB had already brought rates down to 2%, around neutral, after returning inflation to target, so it can move gradually into restrictive territory; the team expects no hike at the next meeting but sees a December hike as difficult to avoid.
• Morgan Stanley considers the market’s pricing of three ECB hikes through March 2025 excessive, although stronger-than-expected inflation and resilience could justify one additional hike in March.
• The BoJ is expected to hike twice, in December and March, versus three hikes priced by markets, because Japanese inflation reflects yen weakness and commodity prices while real consumption remains 1% below pre-COVID levels.
• In Asia, stronger export-led growth should prompt countercyclical hikes even though core inflation is generally within central banks’ comfort zones, while Brazil is still easing and Mexico is holding rates.

Takeaway: Investors should not assume synchronized global tightening; the endpoint for each hiking cycle will depend on domestic inflation, wages, labor markets, demand and the degree to which higher long-term yields have already tightened financial conditions.