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Where Are Rates Headed? Bet on Higher for Longer—Here, Everywhere.



Higher-than-expected consumer prices and a strong jobs report have rekindled concerns the Federal Reserve may lift interest rates to higher levels than previously forecast to keep soaring inflation under control.

Those worries extend beyond the U.S., as the moves could squeeze other global economies and push central banks around the world on a similar path.

“As inflation is slow to come down in the U.S., international investors are increasingly concerned that global central banks will extend their rate-hiking campaign for the rest of this year,” says Jeffrey Roach, chief economist for LPL Financial.

In January, the personal-consumption expenditures price index—a measure the Fed watches closely to gauge inflation—increased 5.4% from a year ago, according to data released on Friday. That was up from 5.3% the prior month and well above what economists had been expecting.

Meanwhile, the U.S. economy added more than twice as many jobs in January than forecast, while the unemployment rate fell to the lowest level in at least 50 years. 

Traders are now betting on a 59% probability that the central bank could raise its target rate to 5.5% by June, according to CME Group’s FedWatch Tool.

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A globalized economy and highly connected supply chain means higher prices in one country can easily pass on to another. There is also the substitution effect: As U.S. bond yields go up, more capital will flow toward the American market for the higher returns—another factor that could pressure other central banks to lift their rates as well to retain capital.

U.S. rate dynamics has gravitational pulls across the world, says Wei Li,


‘s global chief investment strategist, and countries that are more heavily indebted—all else being equal—are usually more vulnerable to U.S. influences.

Indeed, many major central banks around the world have been following the Fed’s lead, raising their borrowing costs over the past year. Since January’s U.S. jobs report, many are expected to lift their rates to even higher levels—and for a longer period—than previously thought.

Sweden’s central bank, the Riksbank, for example, was expected to reach a peak rate of 3.2% by June before the latest U.S. jobs number came out. Now, the market is projecting a peak rate of 3.8% that could last until the end of 2023. 

Likewise, the expected peak rate for the Reserve Bank of Australia was pushed up from 3.7% to 4.4%, and the market is now expecting rate hikes to continue until the end of the year instead of the previous projection of June. 

“Often enough, the themes—such as sticky inflation and possible soft landings—go across country boundaries, and the U.S. is a leader in economic trends that drive central bank and financial markets activities,” says Deutsche Bank macro strategist Alan Ruskin.

Here is a look at how other major economies are doing when it comes to inflation. 

United Kingdom

The Bank of England started raising its interest rate in late 2021 when it was close to zero at 0.1%. The bank has moved its benchmark rate up 10 times and recently pushed it to 4.0%, the highest level since 2008. 

At its latest meeting, the central bank signaled the tide might be turning.

“We’ve seen the first signs that inflation has turned the corner,” said BoE Gov. Andrew Bailey, “But it’s too soon to declare victory just yet, inflationary pressures are still there.”

U.K.’s inflation rate peaked last October at 11.1%, but has pulled back since then to 10.1% as of January. The BoE expects its past rate hikes to bring the country’s inflation down to about 4% by the end of this year. Previously, it had forecast 2023 inflation at around 5%.


The European Central Bank, responsible for 20 countries in the region that share the euro, started its rate-hiking cycle much later than the U.S. and U.K. As of last July, the rate it pays on bank deposits was still in the negative territory, but it climbed quickly to reach 2.5% by February.

The eurozone’s headline inflation has been easing—at a rapid pace—since peaking at 10.6% in October, now sitting at 8.6% as of January. But core prices, which exclude volatile items such as food and fuel, continued to rise.

At its last meeting, the ECB signaled at least one more hike of 50 basis points should be expected in March, reaffirming it would stay the course in the fight against high inflation.


India has followed a similar path as most Western countries. The Reserve Bank of India started lifting its benchmark interest rate in early 2022—when it was at 4%—and most recently pushed the rate higher by quarter-point to 6.50%, the highest level since before the pandemic. 

Many economists expect the


to raise rates by another 25 basis points in April, but will likely end its tightening cycle after that as it weighs the effects of earlier increases. There have been signs of cooling inflation and weakening growth.

Inflation in Asia’s third-largest economy has stayed above the central bank’s upper tolerance limit of 6% for much of 2022. Although the numbers have softened a bit in November and December, inflation shot up to 6.5% in January as the growth in food prices accelerated again.


Japan has a different story from the West. The country’s interest rate has stayed ultralow for decades thanks to its economic doldrums and stagnant wages.

The recent inflation is viewed as a good thing for the country with low growth, and it is no surprise that the

Bank of Japan

hasn’t made any change to its interest rate, which has stayed at minus 0.1% since 2016. As a result, the country has seen its inflation rate continue to rise, from negative growth in 2021 to 4.3% as of January.

Still, some market participants expect that the BoJ might finally join its other peers to push interest rates higher this year. In December, the bank slightly raised the cap on its yield curve control policy, which limits the interest rate on its long-term government bonds. The Japanese central bank is also set to have a new governor in April, replacing the ultra-dovish predecessor for the past 10 years.

BlackRock’s Li sees a change in Japan’s monetary policy as a matter of when, not if. And when that happens, it could have a large impact on global rate dynamics given the amount of foreign bonds held by Japanese institutions.

Still, things could take a while. Ruskin notes recent comments from the new BoJ governor sound dovish so far. “The hopes earlier this year for a more hawkish BoJ have been squashed for the time being,” he says.

The market currently expects Japan’s interest rates to pick up slightly to reach 0.2% by the end of 2023 and 0.5% by the end of 2025.


The Chinese economy was hit hard during the pandemic, especially as Beijing implemented the strict zero-Covid policy that kept the country locked down for nearly three years. After the central government shifted to a pro-growth stance last December, the world’s second-largest economy started showing signs of recovery.

Inflation in China, 2.1% as of January, isn’t a major concern for the country right now. The People’s Bank of China has kept its benchmark lending rates unchanged—the one-year loan prime rate at 3.65% and the five-year rate at 4.30%—since last August.

Many economists think the Chinese central bank could even cut its key rates this year to boost domestic demand, given challenges to its growth outlook such as weakening exports and fragile consumer confidence.

Write to Evie Liu at

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