The Franklin Templeton Fixed Income (FTFI) Central Bank Watch is a qualitative assessment of the central banks for the Group of Ten (G10) nations plus three additional countries (China, India and South Korea). Each central bank is scored on three parameters: Inflation Outlook Perception, Quantitative Easing/Liquidity Management Programs, and Interest Rate Forward Guidance. Each parameter can be scored from a range with a minimum of –2 (dovish) and a maximum of +2 (hawkish). The methodology for scoring compares the latest monetary policy statement/press statements with prior ones to see how the language and tone regarding each of these parameters may have changed over time. The scores are ultimately aggregated for each central bank, with a final FTFI score ranking each from –6 (for most dovish) to +6 (for most hawkish). We also provide our one-year ahead policy rate expectations and compare our rankings and expectations with market implied policy rates to evaluate how the difference between our expectations/rankings and market expectations/rankings.
Key highlights
Federal Reserve (Fed) and Bank of Canada (BoC) in wait-and-watch mode: In March, the Federal Open Market Committee (FOMC) kept median rate projections unchanged, but rising geopolitical and energy-driven inflation risks—and a subtle hawkish shift among officials—support a longer Fed hold. In Canada, inflation sits near target and the economy remains in excess supply; the BoC is looking through the near-term oil shock and signaling flexibility, which makes near-term rate hikes unlikely.
Central banks in Europe are ready to react: Many European economies rely heavily on energy imports, keeping inflation risks front and center for policymakers. The European Central Bank (ECB) faces weaker expected growth alongside rising inflation and signaled it will respond quickly if the energy shock persists and lifts core inflation. Similarly, the Bank of England (BoE) dropped references to further easing this year and renewed its focus on inflation risks. In the Nordics, the Riksbank is buying time before it reacts, while Norges Bank will likely begin hiking soon. The Swiss National Bank (SNB) has focused more on preventing an excessive Swiss franc appreciation than on inflation; it emphasized foreign exchange (FX) intervention and kept rates at 0% with a high bar for hikes.
Asia’s net energy importer tag a concern: The Middle East conflict and the resulting supply-side shock put Asia—broadly a net energy importer—under pressure. Central banks in South Korea, New Zealand and India will weigh the risks; they may calibrate any tightening depending on how long the conflict lasts. We continue to expect the Bank of Japan (BoJ) and Reserve Bank of Australia (RBA) to raise rates, likely in April and May respectively, as they respond to inflation concerns. By removing explicit references to rate cuts, we believe the People’s Bank of China (PBoC) is signaling patience, favors targeted liquidity tools, and may push expected easing into the second half of the year.
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WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
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