Current Interest Rate Expectations
The Bank of Canada suggests a 45 basis point reduction but has a 56% chance of maintaining current rates. In contrast, the Reserve Bank of Australia anticipates a 125 basis point cut, with a 69% probability of a 25 basis point decrease at the upcoming meeting. The Reserve Bank of New Zealand projects an 81 basis point cut, and the Swiss National Bank expects a 27 basis point reduction, holding a 74% probability.
Conversely, the Bank of Japan forecasts only a 7 basis point cut, with a 99% likelihood of no change. The selloff has shifted sentiment from earlier optimism linked to Trump’s tariffs pause, resulting in renewed expectations for rate cuts.
There are varying expectations for the RBA, which may see a combination of 25 and 50 basis point cuts. Some predictions for the Swiss National Bank suggest returning to negative rates. The Bank of Canada’s positioning remains an outlier, showing unexpected hawkish behaviour.
Interest Rate Repricing
The article you’ve just read outlines how the downturn in equity markets has caused traders to re-evaluate where interest rates are likely headed across a suite of major central banks. There’s now a broad repricing underway, where expectations are being recalibrated in favour of easing monetary policy before year-end. Essentially, the decline in share prices has started to put pressure on policymakers to consider loosening financial conditions rather than tightening further.
At the forefront of this reassessment stands the Federal Reserve, where market participants are pricing in close to a full percentage point of rate cuts by year-end. Despite that, there’s still a surprisingly high chance placed on no action at the next meeting. That’s a divergence not to ignore. In Europe, the expectation is more consistent: the central bank there has nearly unanimous pricing for a cut, and not a small one either. Across the Channel, the United Kingdom paints a similar story — a high certainty of rate reduction and a clear path towards easier financial policy.
In Geneva, the outlook also leans dovish, but there’s a flicker of something more aggressive beneath the surface. Projections now imply a potential shift back towards negative rates, which for a long while had been considered off the table. It’s an eyebrow-raising twist that likely reflects the mounting external pressures from both currency valuation and excessive tightness in domestic lending conditions. By contrast, markets in Canada are grappling with uncertainty. While official forecasts allow for a moderate reduction in borrowing costs, the probability distribution remains finely balanced, indicating discomfort or at least lack of conviction in the direction. This slight hawkishness jars with global trends, a stance that’s become increasingly difficult to justify now that real economic indicators are degrading.
New Zealand, meanwhile, is quietly aligned with the general tilt towards lower rates, though not yet indicating urgency. Australia, on the other hand, features one of the steepest projected trajectories. Traders are pricing in as much as 125 basis points of cuts in total, with a strong likelihood that the easing could commence as early as the next meeting. The projections include a possible sequence of both 25 and 50 basis point moves, which would mark an aggressive tack compared to recent years. Given that, the probability skew implies preparatory positioning is already underway.
The position of the Japanese central bank stands alone. With nearly universal expectations that no rate move is imminent, and very modest adjustments forecast in the medium term, the prevailing view is stability. This may reflect internal inflation metrics but also importantly their differing pace of recoveries compared to Western economies. The clearest takeaway is that Tokyo has no appetite for change — at least not until external shocks force their hand.
From where we sit, these shifts offer clarity rather than confusion. Traders should see this re-pricing as directional rather than tentative. The previous optimism linked to a suspension of tariffs has faded — replaced now with renewed caution and policy accommodation as the dominant theme. Pricing is telling us what markets might not say openly: there’s now concern that growth is slipping faster than expected and that easing will be the preferred method to contain fallout.
What we must do, then, is act. Positioning into the front end of curves where looseness is increasingly priced is one option — particularly in jurisdictions pricing larger reductions with relatively higher near-term probability. That means favouring exposure where policy rates haven’t adjusted yet but likely will, as data continues to deteriorate. Monitoring the firm shift in expectations around Antipodean policy could shape term structure trades as well, given the pace and size of forecasted cuts down there.
Volatility levels — particularly in short-dated contracts — ought to remain elevated as conviction in central bank trajectories firm up or fragment. In such periods, carry on risk-adjusted trades grows in importance. Since current probability distributions are being driven more by shifts in outlook than by realised inflation or growth, we suspect that sensitivity to revisions will remain high.
The short end is no longer dull. When pricing becomes compressed near decision points, dislocations surface quickly. That’s when rapid recalibration in positions, or where to lean hardest on curve steepeners or flatteners, becomes most critical. The time for passive observation has passed.
