The world's major central banks are likely to keep interest rates high in 2027. Rising energy prices and AI investment are supporting financial conditions, while attention is focused on developments in the US, Japan and Europe, and the scope for easing in China.
The outlook for a global rate-cutting cycle, which had been widely priced in at the beginning of the year, has been overturned by actual developments, and monetary policy is shifting toward tighter settings amid several factors, including escalating tensions in the Middle East, long-term government bond yields remaining elevated, and AI-related investment supporting the real economy.
Bloomberg Economics' model shows that interest-rate forecasts for the central banks of 23 countries have been revised upward, and are likely to be above previous projections as 2027 begins. Around 25 basis points of additional rate hikes are already priced into aggregate borrowing costs.
IMF Managing Director Georgieva has publicly said that central banks should maintain cautious and hawkish stances against a backdrop of renewed energy price increases and widening fiscal deficits. This week, central bank governors are scheduled to gather in Bangkok for the IMF annual meetings to discuss the agenda.
The Federal Reserve currently maintains a range of 3.75% to 4.00%, and some expect gradual rate cuts through the end of 2027, given elevated long-term interest rates and a reassessment of fiscal risks. Expectations are building that the ECB will raise rates in December, with the deposit facility rate expected to increase to 2.75%. Expectations for additional Bank of Japan rate hikes by year-end are rising, with rates forecast to reach 1.5% at the end of 2026 and 2.0% at the end of 2027.
The People's Bank of China's scope for easing is subject to two constraints: the global rate-hike cycle and weak domestic demand. China's 7-day reverse repo rate is currently 1.4%, and further declines are seen as limited.
The global outlook is that major central banks will prolong the high-interest-rate environment as geopolitical energy shocks, mounting fiscal pressure and a wave of capital investment driven by AI combine.
Outside China, a Reuters poll shows growing expectations that the ECB will find it difficult to shift toward easing in the near term.