After the Bank of Japan hiked interest rates this week, while the Bank of England, the US Federal Reserve and the Reserve Bank of Australia kept them on hold, investment managers discuss the impact and potential rate cuts or hikes.

The Bank of Japan hiked interest rates this week, as expected, while the Bank of England, the US Federal Reserve and the Reserve Bank of Australia kept them on hold.

Looking at the Bank of England’s decision to hold interest rates at 3.75 per cent, Andrew Wishart, senior UK economist at Germany's Berenberg, said the recent news, data and the Monetary Policy Committee (MPC) response to it suggest that, in the absence of further shocks, the Bank of England (BoE) will resume rate cuts by year end.

“Both the scale and duration of the Iran shock look set to be far smaller than the BoE expected just six weeks ago,” he said. “While the MPC will likely remain split, we think that enough members are relaxed enough about inflation and worried enough about the labour market to deliver a cut by year end. Expect dovish members to start to vote for a rate cut soon. We think that a quintet of Bailey, Sarah Breeden, Swati Dhingra, Dave Ramsden and Alan Taylor will join forces to create a majority for a reduction in bank rate to 3.50 per cent by year end."

The US Federal Reserve also held US interest rates between 3.5 per cent and 3.75 per cent this week, after Kevin Warsh’s first meeting, with governors split on the decision. The Reserve Bank of Australia kept them on hold while the Bank of Japan hiked interest rates to a level unseen in 30 years from 0.75 per cent to 1 per cent, aiming to normalise monetary policy.

Wishart was among a number of strategists and economists who commented on central bank announcements and decisions. Here are other reactions.

Bank of England
Lale Akoner, global market strategist, eToro
“The Bank of England’s decision to leave rates unchanged reinforces the view that policymakers are in no rush to tighten further, despite inflation remaining above target. Recent inflation and wage data have come in softer than expected, giving the Bank more time to assess how the economy responds to already high borrowing costs. However, higher business costs and resilient wage growth could keep inflation elevated, leaving the door open to rate increases if price pressures prove more persistent than expected.

“For investors, a period of stable rates is generally supportive for interest rate-sensitive sectors such as housebuilders, real estate and consumer-focused stocks. It also provides greater certainty for households and businesses after a prolonged period of policy tightening. However, with inflation still expected to remain above target into next year, the risk of another rate increase has not disappeared entirely. The bigger story is the growing gap between the BoE and its peers. While the Federal Reserve remains focused on inflation risks and the European Central Bank recently raised rates, the BoE is taking a more cautious approach. That could keep pressure on sterling and leave UK markets increasingly influenced by developments in the US rather than domestic monetary policy.”

Alexandra Loydon, group advice director at St James’s Place
“The Bank of England’s decision to hold interest rates at 3.75 per cent comes as little surprise, particularly after yesterday’s news that inflation remained at 2.8 per cent in May. The recent US-Iran truce and subsequent easing in energy prices may have taken some pressure off the bank to raise rates further, but with inflation still above the Bank’s 2 per cent target and borrowing costs still high, households across the UK are likely to continue to feel the squeeze. In times like this, building a financial plan is a wise decision, with our research showing that 72 per cent of those with a plan feel more confident about their financial position, compared to 51 per cent of those without one. It’s also worth thinking about how different parts of your money are working for you. Cash savings remain important for short-term needs, but for those with longer-term goals, investing through a well-diversified approach can help individuals position themselves in the best way possible way and prevent inflation from eroding cash savings over the long term.”

Michael Browne, global investment strategist, Franklin Templeton Institute
“In the current environment, where positive and negative data points are broadly balanced, it is understandable that the MPC has chosen to sit on their hands and hold rates steady. Inflation is likely to rise into July following the next domestic energy price cap reset, as the effects of the Iran will not yet be evident by then. The real test comes in September: will there be evidence of second-round effects? Will the autumn wage round - across public and private sector – prove sufficiently restrained to keep longer-term inflationary risk in check? By autumn, the data should provide clearer answers, and the MPC’s decision to hold may well be vindicated. Until then, both the MPC and the markets will be left to wait and watch.”

Isabel Albarran, investment officer at Trinity Bridge
"While domestic activity has arguably been stronger than anticipated, May’s inflation print suggests that pass-through from higher energy prices has been less pronounced than expected. Coupled with the recent agreement between the US and Iran and a shift lower in energy prices, this alleviates some of the pressure to hike rates. This is all welcome news for bond holders globally, but the gilt market may continue to come under pressure for reasons closer to home, as attention shifts from the Strait of Hormuz to Makerfield.”

Luke Bartholomew, deputy chief economist, Aberdeen
“The two votes for a hike show there are some policymakers still concerned about underlying inflation pressures. But with the recent fall in energy prices and the softer inflation data, events are evolving in line with, or potentially even better, than the Bank’s scenario A from the last meeting, which was consistent with keeping rates on hold this year. And this is likely what is influencing most members of the Monetary Policy Committee. Certainly, inflation has higher to move yet after the upcoming increase in the energy price cap. But the conditions don’t seem in place for sustained inflationary pressure. So we think the BoE will be able to avoid the kind of monetary tightening that the European Central Bank has already started to deliver and that the Fed hinted at last night. In fact, if energy prices continue to moderate then the debate could once again turn again to rate cuts, but that might have to wait until next year.”

George Brown, senior economist, Schroders
"For now, the Bank is playing for time rather than going on the attack. Rising inflation expectations have earned a yellow card from a couple of hawkish dissenters, but the majority are content to wait. We think the bar for hikes remains high. A softer labour market and weak growth should help limit second-round effects, and progress on reopening the Strait of Hormuz should also reduce some of the more extreme upside risks to energy prices. But the bank cannot afford to be complacent. If inflation expectations continue to drift higher, it may yet be forced to step in."

US Federal Reserve
Paolo Zanghieri, senior economist at Generali Investments
“A divided Federal Open Market Committee (FOMC) now sees a rate hike this year. The Fed appears more concerned than expected about high and sticky inflation. Its much shorter statement dropped forward guidance and stuck to the facts. New chair Kevin Warsh held back his own projections and offered little economic analysis in the Q&A. Instead, he began to set out his vision for the Fed: a central bank with a narrower remit, a wider lens, and a stronger focus on financial-market signals. Five task forces will review how the Fed communicates, manages its balance sheet, uses data, assesses productivity, and analyses inflation. They are expected to complete their work by year-end. Our baseline has no Fed rate moves this year or next. Markets pushed the two-year Treasury yield to 4.2 per cent, its highest level in more than a year.

Jon Butcher, senior US economist, Aberdeen
“The Fed funds target rate was left unchanged.Communication around the decisions was significantly reduced relative to previous meetings, with the FOMC statement shortened and all forward guidance removed. The only indication of future policy direction was the dot plot. This showed half of FOMC members now expect at least one hike in 2026, with the median dot sitting between a hike and hold. However, it is not clear whether the dot submissions were done before or after the announced deal between US and Iran. Chair Warsh announced a series of task forces to review Fed operations in a number of areas, including communications and the balance sheet.

"Reform aside, Warsh’s focus seems to be on getting inflation back towards the Fed’s 2 per cent target. This will likely take some time due to sticky services prices, but we expect gradual progress in the right direction. We continue to expect the Fed to keep rates on hold through the duration of 2026, and think a hike is not justified barring a resumption of conflict in the Middle East and oil moving sharply higher again.”

Josh Jamner, senior investment strategy analyst, ClearBridge Investments
“The Warsh Fed kicked off its new chapter today with no change to interest rates and the announcement of several new task forces – communications, the balance sheet, data, productivity & jobs, inflation – as Kevin Warsh leads a broader review of the best way to deliver on the Fed’s dual mandate of price stability and maximum employment. Chair Warsh emphasized the committee’s commitment to delivering price stability repeatedly throughout the press conference, which the markets have interpreted as hawkish given the increase in 10-year Treasury yields and sell-off in equities. The press conference itself ran a typical length in contrast to the Fed’s statement which was substantially shorter than in recent years.

"This new shorter statement did not include forward guidance, which multiple FOMC members indicated was not well suited to the current juncture according to the chair. The Fed is poised to provide less guidance to financial markets, likely leading to increased volatility although Warsh himself pushed back on that notion during the press conference. Overall, Warsh communicated a desire to improve and enhance the Fed’s ability deliver on its mandate by casting a wide lens but keeping the remit narrow. Investors will ultimately need to stay tuned to see what the task forces deliver, but one thing is clear now; a new chapter at the Fed has begun.

Isabel Albarran, investment officer at Trinity Bridge
“As expected FOMC members left rates unchanged at the meeting, but the changes to the outlook going forward are notable. The question on everyone’s lips going into the meeting was – will the Fed’s updated forecasts indicate hikes rather than cuts and, if so, how many. Market expectations for future path of US interest rates have shifted higher over recent months, with one now hike priced over the next twelve months, where cuts had previously been forecast. The new forecasts indicates that half of FOMC members anticipate a hike this year, more than the market likely expected, with the median rate forecast drifting up to 3.75 per cent from 3.4 per cent in March and only falling modestly in 2027.

"The statement also dropped wording that suggested further easing could be on the table. Overall, the market has taken this decision as a hawkish move, showing that, despite recent developments between Iran and the US and subsequent fall in oil price, FOMC members remain concerned about the persistence of inflation."

Japan
Colin Finlayson, investment manager at Aegon Asset Management
''The BoJ raised to 1 per cent, the highest official interest rates have been in Japan since 1995. Inflation is comfortably above the average level of the last 25 years and now, with the rise in energy prices, there are also upside risks to headline CPI.

"Their government’s expansionary fiscal plans are expected to bolster economic growth in the coming period, which could add further fuel to the fire. This made the BoJ’s decision to tighten policy an easy one and one that is likely to be repeated again in the second half of the year. Japanese Government bonds have been relatively friendless for much of the last year and the BoJ’s action today will do little to change that. For investors who can invest globally, there are more attractive destinations to allocate to at this time. Some stability the JGB’s and the Yen will be needed before the Japanese market is sufficiently attractive again for global bond investors.''