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
Measured easing in North America: The Federal Reserve (Fed) cut interest rates in December amid internal divisions, signaling a higher bar for future easing with policy near neutral. While the Fed projects one more cut in 2026, we expect a prolonged pause at least through May when Fed Chair Powell’s term ends, unless labor weakness forces risk-management cuts. In Canada, although we think the Bank of Canada (BoC) has reached its terminal rate, the future of the US-Mexico-Canada trade agreement could play a role in determining policy. Markets expect the BoC to hike by the fourth quarter.
Central banks in Europe are taking their time: With an expected upswing in economic growth next year, both the European Central Bank (ECB) and the Riksbank appear comfortable remaining on hold after bringing their easing cycles to a close, while retaining flexibility should the data deviate materially from current forecasts in both directions. By contrast, the Bank of England (BoE) and Norges Bank continue to guide toward gradual and cautious easing into 2026, seeking further disinflation evidence before further rate cuts are delivered. We expect the Swiss National Bank to keep rates at zero at least through end-2026. The bar for negative rates remains high, and foreign exchange interventions will likely be preferred to manage currency pressures.
Will Asia be the first to hike? Despite trade uncertainties, growth has been more resilient in the Asia-Pacific region in 2025. With fiscal support measures also kicking in, we expect a long pause in both South Korea and India. Growth is looking to finally turn for the better in New Zealand, prompting the Reserve Bank of New Zealand (RBNZ) to likely stay on an extended pause in 2026. It will be in a close race with Australia to determine who will be the first to hike as the Australian economy stays robust amid sticky price pressures. That central bank will join the Bank of Japan’s (BoJ) tightening club, as we expect two more rate hikes in Japan during 2026. In China, although Beijing has acknowledged the need to reverse deflationary impulses, the room for additional easing is constrained by historically low levels of bank margins. We believe the People’s Bank of China is therefore likely to favor incremental, targeted easing.
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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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