cuts for central banks

Bank of America Global Research discusses its expectations for major central banks policy trajectory.

"Assuming inflation proves indeed to be persistent, we would expect most central banks by the end of this year or early next year to bring some form of forward guidance back. Instead of hiking more, they could commit to keep interest rates high, for as long as it takes to bring inflation back to the target, or close enough. This is very similar to their commitment in the low inflation era, to keep interest rates low until inflation was back to the target," BofA notes.

"Assuming we get such forward guidance, the FX implications will depend on the timing, strength of commitment and by how much interest rates have increased in the meantime. As an exercise, let's assume that all G10 central banks will hike by as much as markets are pricing today, but will not cut rates in the next 2 years. Exhibit 5 suggests, keeping everything else constant, this will be positive for the USD and CAD, particularly against JPY and EUR," BofA adds.

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