After major central banks, the Bank of Japan, the Bank of England, the European Central Bank and the US Federal Reserve, kept interest rates on hold last week, as expected, wealth managers discuss the impact on asset allocation and potential upcoming rate hikes.

Amidst the US-Iran conflict, fraught geopolitics and high energy prices, the Bank of Japan, the Bank of England, the European Central Bank and the US Federal Reserve left interest rates unchanged last week, as expected.

The Bank of Japan (BoJ) kept the benchmark interest rate at 1.00 per cent after the meeting on Friday, as anticipated. However, Japanese Governor Ueda’s hawkish tone and upgraded inflation projections suggest that interest rate hikes could be imminent. David Kohl, chief economist at Swiss private bank Julius Baer predicts interest rate hikes in October 2026 and March 2027, bringing forward his previous predictions of December 2026 and June 2027, and bringing them more in line with money market pricing.

A number of wealth managers anticipate rate hikes this year. Kazumasa Ishii, strategist and Daiju Aoki, chief investment officer Japan, at UBS Global Wealth Management, maintain their forecast for rate hikes in December 2026 and June 2027.

Patrick Ho, chief investment officer, North Asia at HSBC Private Bank and Premier Wealth's base case remains that the BoJ will conduct one more potential 25 basis points rate hike in December, taking the policy rate to 1.25 per cent by year-end, but the risk of an earlier move in October is rising.

Ishii and Aoki’s end-2026 10-year Japanese Government Bond (JGB) yield forecast remains unchanged at 2.7 per cent, as they believe the current rate path has been priced in. They see further potential for gains in Japanese equities as market leadership broadens beyond AI, and a catch-up rally in cyclicals remains possible if energy supply normalizes. They maintain their attractive view on Japanese equities. Japanese semiconductor-related stocks have corrected sharply alongside global peers but are beginning to recover.

Meanwhile, Ho maintains his neutral stance on Japanese equities, JGBs and Japanese Yen (JPY). “We stay neutral on Japanese equities,” Ho said. “Despite Japan’s high reliance on imported oil and related inflation worries, markets have weathered the impact as investors continue to lean on stocks that ride on the AI theme, and banks that benefit from higher rates and PM Takaichi’s pro-growth fiscal policies,” Ho continued. “While we are neutral, we still see opportunities in domestic reflation plays in Japanese technology and financials stocks.”

“We maintain our neutral view on JGBs. In the near term, we expect headline-driven trading around inflation prints, growth data, geopolitics, fiscal developments, and the JPY,” Ho said. In his view, the varying forces should keep JGBs largely range-bound rather than in a sustained directional trend.

“We stay neutral on JPY as well. Dollar JPY fell as much as 3.3 per cent overnight, as it was reported that authorities entered the currency market overnight to support the JPY,” Ho said. In his view, a more hawkish BoJ, more credible fiscal discipline, and possibly targeted capital-flow measures may be needed to reset fundamentals and expectations, alongside a weaker dollar.

Bank of England reactions
The Bank of England (BoE) voted 6-3 to keep the bank rate unchanged at 3.75 per cent last week, as expected, highlighting that while policymakers are comfortable leaving rates unchanged for now, they are far from convinced about tackling inflation. “Domestic price pressures continue to ease, and the labour market is gradually cooling, but renewed geopolitical tensions and higher oil and gas prices have shifted the focus back to upside inflation risks, increasing the likelihood that rates will remain restrictive for longer,” Ho said. “Markets interpreted the decision as a pause rather than the end of the tightening cycle, with strong demand for UK gilts reflecting expectations that policy will stay tight while inflation risks remain elevated.”

Against this backdrop, Ho remains neutral on UK equities given domestic growth and political challenges, while continuing to favour longer-duration bonds as yields become more attractive and remaining constructive on index-linked gilts as protection against persistent energy-driven inflation.

With the vote split marginally tighter than expected at 6-3, Felix Feather, economist, at Aberdeen believes that this was a slightly more hawkish Bank of England hold than expected. He still sees a path to avoiding rate hikes. “The BoE’s next full monetary policy report meeting won’t come until November leaving plenty of opportunity for the situation in the Middle East to de-escalate before the monetary policy committee's (MPC) hand is forced. Still, risks to our forecast for rates to remain on hold until the end of the year are very much stacked to the upside,” Feather said.

Isabel Albarran, investment officer at Trinity Bridge also highlighted that three members supported a hike and futures continue to price in around three quarters of a percentage point of tightening in the coming 12 months, starting in November. “This is not just a UK phenomenon and reflects global factors, such as energy-related inflation expectations and stronger-than-expected economic activity. Bond yields have risen in a relatively similar way in Europe and the US,” she said.

“However, with Andy Burnham entering No 10, attention is also turning to fiscal policy,” Albarran continued. “While the current fiscal rules don’t offer a great deal of headroom for additional spending, Burnham and his Chancellor are expected to raise spending, either funded by taxation or an adjustment to the interpretation of the “investment” part of the fiscal rules, which would mean more borrowing. Both of these approaches could see bond yields edge higher.”

European Central Bank reactions
After the European Central Bank (ECB) decided to hold interest rates steady last week, as expected, Dr Karsten Junius, chief economist at Bank J Safra Sarasin, considers some indirect and second-round effects of the energy price shock to be unavoidable. He still expects another rate hike from the ECB in September, even if oil prices fall to pre-war levels again. He also sees no reason for the ECB to reverse those rate hikes next year.

David Kohl, chief economist at Julius Baer, highlighted that eurozone GDP for the second quarter of 2026 exceeded expectations, providing a rare positive development amidst the energy crisis induced by the Iran war. However, July inflation accelerated again to 2.9 per cent year-on-year, driven by climbing energy costs and persistent services price inflation, dashing hopes of sustained disinflation. “Together, these figures have significantly eroded confidence in an extended ECB pause and reinforced market expectations of a rate hike in September,” Kohl said.

“The combination of firmer growth and accelerating inflation, particularly in the core and services sectors, undermines the case for an extended ECB pause,” he continued. “Market participants are now pricing in an approximately 85 per cent probability of a rate hike in September. In light of the data, our prior conviction that rates would remain unchanged has materially diminished.”

The US Federal Reserve Reactions
After the Fed held interest rates steady at 3.50 to 3.75 per cent last week, as expected, Kay Haigh, global head and CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, said that the Fed appears to be running out of patience with above-target inflation, despite recent data coming in cold. “The committee’s growing hawkish sentiment, shown by the three dissents against the hold, has also likely been exacerbated by the recent flare up in hostilities in the Middle East,” Haigh said. “A hike in September is finely balanced, with any further action likely dependent on a combination of developments in the Middle East and the next two consumer price index (CPI) prints.”

Daniel Siluk, head of global short duration and liquidity and portfolio manager at Janus Henderson Investors, still characterises the outcome as a hawkish hold on balance: the statement was essentially unchanged, growth and inflation language remained firm, and the three dissents in favour of a hike underscore that a meaningful faction of the committee remains concerned about inflation.

Meanwhile, Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, believes that the Fed will only engage in a hiking cycle from December, contingent on data remaining tight. Markets have reduced their odds of a September hike and appear aligned with the firm's view on the timing of the next hike. However, incoming data and geopolitical developments over the next two months will keep the risks of a September hike alive.