Central Banks in Many Countries May Shift to Rate Hikes Next Year! Will the Rate-Cutting Fed Become an “Outlier”?

According to CLS on December 10, barring any surprises, the Federal Reserve is set to implement its third rate cut of the year tonight, which will also be the sixth cut in this round of the easing cycle. Meanwhile, with U.S. President Trump holding the nomination power for the next Fed chair, the Fed is likely to retain some scope for further rate cuts next year...

However, from a global perspective, while the Fed remains in an easing cycle—perhaps not even at the end of this cycle—its monetary policy trajectory may already be an “outlier” among major economies: from Australia to Europe to the U.S., traders have recently been betting that central banks’ monetary easing policies will halt or even fully reverse!

Swap market pricing currently suggests the European Central Bank (ECB) is more likely to hike rates than cut by 2026. Market traders now almost rule out further ECB rate cuts, and the probability of a hike by the end of 2026 stands at about 30%.

A hawkish comment from an ECB official on Monday has prompted a reassessment of the bank’s policy path. ECB Executive Board member Isabel Schnabel said she believes the next move in borrowing costs should be upward, fueling market expectations for an ECB rate hike next year.

On average, swap market pricing currently implies that ECB rates will rise by 7 basis points by the end of next year. In contrast, the market was pricing in a 4-basis-point cut as recently as last weekend.

Meanwhile, in Australia, Reserve Bank of Australia Governor Michele Bullock on Tuesday ruled out further easing, and swap markets now suggest the RBA will hike nearly twice by the end of next year, with each hike around 25 basis points.

Investors are also betting that Canada will raise rates next year as the economy recovers—recently strong November jobs data in Canada has led traders to see some chance of a small rate hike early next year.

The Bank of England is expected to end its rate-cutting cycle before next summer. The OECD said last week that the Bank of England is expected to “stop cutting rates in the first half of 2026,” as the organization sees the UK as one of the few large economies where rates are already near the so-called neutral rate—the theoretical level that neither restrains nor stimulates economic growth.

This has made the Bank of Japan, which many traders considered an “outlier” earlier this year, now appear more “normal” than the Fed—industry insiders now almost unanimously believe the Bank of Japan will raise its benchmark rate by 25 basis points to 0.75% next week, and is expected to hike at least once more next year...

TD Securities analyst Pooja Kumra noted that next year could be a “turning point” for policy at the ECB, Bank of Canada, and RBA, adding, “Hawkish voices are growing louder.”

T. Rowe Price’s European chief macro strategist Tomasz Wieladek said, “The actual impact of global tariff shocks has been far less than initially expected, and central banks around the world are gradually shifting to a hawkish stance.”

Global Bond and FX Markets Set for Turbulence

Jim Reid, Global Head of Macro Research at Deutsche Bank, said in a client note, “It’s noteworthy that more regions are seeing rate hikes as the next move. If this also happens in the U.S., there’s no doubt that risk assets and the economic outlook for next year would be dramatically transformed.”

The most direct result of rate market repricing will undoubtedly be higher yields for long-term government bonds globally. Although yields on U.S., European, UK, and Japanese government bonds dipped slightly on Tuesday, long-term yields have surged this month.

Meanwhile, although this shift may bring U.S. and other countries’ rates closer together, the divergence in borrowing costs could further exacerbate the decline in the dollar—which has already fallen over 8% against a basket of currencies this year.

As a result, many investors are expected to closely watch the policy signals released at the Fed’s December FOMC meeting tonight, especially the dot plot’s projections for interest rates over the next two years. The Fed is currently under ongoing pressure from President Trump to lower borrowing costs.

ING analyst Chris Turner said, “Assuming the Fed maintains a dovish stance... the shift in foreign policy rate cycles will be a key factor for a modestly weaker dollar in 2026.”

Macro strategist Michael Ball pointed out that current market consensus is that the ECB, RBA, Riksbank, Reserve Bank of New Zealand, Bank of Canada, and Swiss National Bank may have ended their easing cycles. The Fed, Bank of England, and Norges Bank are the only three G10 central banks still expected to cut rates in 2026. Therefore, with global nominal economic growth strengthening and ample bond supply in Europe and Japan, global term premia should be reestablished.

Ball noted the result will be market chaos and divergence. The global bear steepening in bonds is likely to continue to put marginal pressure on U.S. Treasuries. Unique U.S. growth and inflation risks, supply-demand dynamics, and political factors surrounding Fed independence will determine whether long-term Treasury yields continue to break out of their recent range.