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Calls for rate hikes suddenly surged!
Around midday today, expectations of a rate hike in South Korea suddenly intensified. Mitsubishi UFJ Financial Group in Japan brought forward its expectation for the South Korean central bank’s rate hike to August, and expects the South Korean central bank to implement “a series of consecutive hikes.” Economists Taimur Baig and Radhika Rao at DBS Bank expect the South Korean central bank to raise the benchmark interest rate by 25 basis points to 3.00% at its August meeting.
As expectations of rate hikes in South Korea increased, Australia’s second-largest pension fund established its largest yen overweight position in years, betting that the market is underestimating the likelihood of the Bank of Japan raising rates. What’s even more surprising is that Australia and Europe are also seeing this: Citigroup believes the Reserve Bank of Australia’s inflation forecasts may deviate from expectations, and the risk of a rate hike rises in September.
Even Schnabel, a member of the ECB Executive Board, said plainly today that given economic resilience, interest rates must be raised further.
Rate-hike expectations suddenly rose
Today, the market has shown a rather interesting development: rate-hike expectations across several developed economies suddenly rose across the board.
First up is South Korea. DBS Bank economists Taimur Baig and Radhika Rao expect the Bank of Korea to raise the benchmark rate by 25 basis points at its August meeting to 3.00%. They also see ample room to lift the 2026 GDP growth forecast from the current 2.6% to about 3.5%, and to raise the 2027 CPI inflation outlook from the current 2.3% to nearly 3.0%. They cited support factors including stronger-than-expected economic growth in the first half of the year, persistent core inflation, and rising home prices. Mitsubishi UFJ Financial Group in Japan even leans toward the idea that the Bank of Korea will deliver “consecutive rate hikes.” The firm recently forecast that the Bank of Korea will hike again by 25 basis points this month.
Next is Japan. Goldman Sachs has pulled forward expectations for the Bank of Japan’s rate hikes, arguing that the September meeting could become a turning point in policy. With exchange-rate stability replacing wage data as the most urgent variable, the focus has shifted. According to tracking trading desk Tsui Feng, in a research note dated August 25, Goldman Sachs Japan economist Tomohiro Ota said that the market now expects the BOJ to hike rates in September—previously, the expectation was January 2027. After that, the plan is expected to involve hikes in both January 2027 and July 2027, lifting the policy rate to 1.75%.
Australia’s second-largest superannuation fund has built, over the years, what is now its largest-ever underweight position in yen. Jimmy Louca, senior investment portfolio manager at Australian Retirement Trust, which oversees retirement savings of around A$370 billion (US$265 billion), said the fund has been steadily increasing this position over the past six months as the yen has weakened against the U.S. dollar to near 160. It is a rare bullish bet on the yen at a time when many investors are looking to sell it.
Rate-hike expectations in Australia and Europe also unexpectedly strengthened. Citi economist Faraz Said said that strong inflation data in July means the quarter-on-quarter inflation rate in the third quarter will exceed the 0.8% increase previously expected by the Reserve Bank of Australia. Citi had previously expected the RBA to raise rates by 25 basis points in November; ahead of next week’s release of second-quarter GDP data, Said is now even more confident that the RBA will need to hike rates again this year. He also believes the risk of a September hike is “quite high,” and that the number of hikes could be more rather than fewer.
ECB Executive Board member Schnabel went even further, saying that because the Middle East conflict has dragged on and the euro area economy has unexpectedly performed strongly, there are upside risks to inflation, meaning interest rates must be raised further. Consumer price inflation could exceed 2% for “a prolonged period.” If policymakers wait until this effect feeds through to wages, they will be acting too late. Schnabel warned that, apart from oil, energy price pressures are becoming more persistent. Given that European natural gas inventories are relatively low, the outlook for the gas market is especially worrying, posing a substantial upside risk to inflation.
The U.S. goes the “opposite” way
For global markets, it may be the United States’ moves that prove decisive.
据 the Financial Times, the actions taken by U.S. Treasury Secretary Bessent to intervene in the bond market run counter to the Fed’s efforts to curb inflation. Bessent’s unexpected intervention in the U.S. Treasury market caused yields to first fall and then rise. The reaction from markets has put even more pressure on Waller’s speech at Jackson Hole on Friday. Waller, chair of the Federal Reserve, has consistently stressed that investors should rely more on economic data and market prices rather than waiting for the Fed’s forward guidance to tell them how future interest rates will move.
Now, there are growing concerns that if Bessent’s efforts to control yields continue to prove ineffective, the Federal Reserve may face pressure to step in. Both Waller and Bessent are protégés of billionaire Stanley Druckenmiller, and the two are often in contact and reportedly get along well. However, the prevailing impression at the moment is that their respective finance ministries are moving in opposite directions to the Federal Reserve.
Not long ago, Jim Bianco, founder of Bianco Research, a U.S. macro research firm that has long tracked the U.S. bond market, said on the Bankless podcast that the Fed needs a clear and credible anti-inflation stance—possibly even resuming rate hikes—before it could suppress the term premium demanded by holders of long-term bonds and bring long-end yields back down. The Fed is cutting short-term rates, but mortgage rates, corporate long-term funding, and stock valuations track 10-year and 30-year Treasury yields; this time, the two have diverged. The reason is not growth—it’s credibility.
However, Zhao Yaoting, Asia Pacific regional global markets strategist at Invesco, believes that instead of focusing on whether central banks around the world will cut or raise rates by 25 basis points, what matters more is the trend of sustained increases in long-term yields. Rising long-end yields have reduced the need for the Fed to hike further. Overall borrowing costs in the U.S. have risen and the financial environment has tightened. That means the bond market is effectively doing the job of the Fed’s tightening policy.