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MNI SARB Preview - Sep 2026: 25bp Hike Likely
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Bank of Canada Governor Tiff Macklem told MNI he is comfortable giving limited forward guidance to explain the direction of monetary policy to Canadians, adding that volatility in investor bets about the path of rates over the last year reflects an unsettled time for the economy.
“That’s really markets at work. To the extent that they understand our objectives, to the extent they understand our reaction function, that assessment I think is a healthy thing,” Macklem said after a speech in Halifax, Nova Scotia.
“That doesn’t in the end mean that we don’t have to do the right thing. We can’t just let markets do it,” he said. “We have to take a judgement as to what we really need to do.”
Since President Donald Trump imposed the first round of tariffs last spring, Canadian investors and economists have priced in bets on two rate cuts, a hold into 2028, and as many as three hikes this year. There are only two meetings left this year and in recent weeks views have consolidated around a couple of hikes by early next year.
HUMBLE GUIDANCE
Decisions must come one meeting at a time and officials have a duty to explain the outlook to Canadians, he said. Those comments come as new Federal Reserve Chair Kevin Warsh says he won't give much forward guidance and instead wants to take signals from financial markets to help meet his inflation and full employment mandates.
“We have to talk about the future. We have to be humble about the fact the future’s unpredictable," Macklem said. "We have to think about the risks, and I think we need to be careful about giving too much forward guidance for the many of the reasons Chairman Warsh has outlined.”
“But you have to find that balance, and I’m generally comfortable with our balance,” he said.
Canadians need to understand that monetary policy acts with a lag to help them align the Bank's ultimate goal with what's going on at the moment, he suggested.
“The fact that inflation is above target now is not the key thing that feeds into our decision. The key thing is where do we think it’s going to be a year, a year-and-a-half from now, and do we need to change the interest rate to get it back to the 2% target over that horizon,” Macklem said.
GOING TO BE TROUBLE
Global bond yields have risen in recent weeks on signs that inflation and budget deficits are becoming bigger concerns, and that the continuing Iran war will push up gasoline prices in particular. Asked about his earlier warning that sovereign debt markets face risks as hedge funds take on a large share of the market, Macklem said there are some market problems that can be curbed while fiscal policy is a more fundamental question.
“There’s been a lot of issuance globally, there’s a lot of debt to absorb, and hedge funds have been doing it very efficiently,” Macklem said.
"In Canada as in other countries we are looking at, are there some things we can do to the infrastructure of the bond market that would improve its resilience given the fact that the buyers have shifted to more private sector and more hedge fund,” he said.
“Obviously, some countries have unsustainable fiscal policies. You’re not going to smooth those over with some new infrastructure," Macklem said. “Countries with unsustainable fiscal policies have to get fiscal policy on a sustainable track, or yeah, there’s going to be trouble.”
Sep-21 23:19
The Bank of Canada is committed to meeting its inflation target even if recent supply shocks also dampen economic growth, and policymakers face hard tradeoffs in coming meetings, Bank of Canada Governor Tiff Macklem told MNI.
“In a world of supply shocks, it’s more difficult. We can’t stabilize output and inflation at the same time,” he said in an interview Monday following a speech in Halifax, Nova Scotia.
“The public’s expectations may not be realized as to what we can deliver," he said. "And in a more uncertain world, I mean let’s be frank, we’re going to make more mistakes.”
Veering from the inflation target would be "counterproductive" and "it is very important that central banks are clear-eyed about what monetary policy can do and what it cannot do," he said.
"We’re an inflation targeter. We’re going to do what we can to stabilize output, but our remit is clear. Our job is to bring inflation back to the 2% target.”
'FINELY BALANCED'
Asked if the next few meetings are close calls, he returned to the idea of conflicting pulls on inflation and growth and noted minutes from the last meeting showed a range of views on slack in the economy.
"You’re dealing with structural change, you’re dealing with supply shocks, so yeah there is going to be some diversity of views,” among Governing Council members, he said. “Even within my own mind, there’s going to be some finely balanced judgments.”
Canada's inflation was at the top of the central bank's target band at 3% for a second month in August, and earlier on Monday Macklem reiterated upside price risks have increased as the Iran war continues. Bets on the Bank hiking its 2.25% policy rate over next few meetings has climbed since the last decision as investors sensed Macklem was turning more hawkish, crude oil moved above USD100 a barrel and the Fed, Bank of Japan and ECB hiked.
“You’re seeing some correlation across central banks because we’re all dealing with high global energy prices, high gasoline prices, high diesel prices,” Macklem said when asked if he was feeling peer pressure to hike. "At the same time you’re seeing some differences because our economies are starting from different places.”
Canada's inflation is lower than the U.S. while growth is also slower he said. “We have a flexible exchange rate, that gives Canada the ability to have its own monetary policy, and gear monetary policy in Canada to the needs of the Canadian economy,” Macklem said.
CONSENSUS DECISIONS
The Bank's consensus decision-making helps the group make better calls, he said.
“We get to a consensus and I feel like we’ve heard from each person, and we’ve tested it and we’ve kicked it, that feels good,” Macklem said. “We’re not going to get every decision right but this makes sure that we’ve really you know tested it within the Council to the best of our ability.” (See: MNI BOC Watch:Hold; Upside CPI Risk Seen With Uncertain Growth)
Coming into the final year of a seven-year term, Macklem said he hasn't decided yet whether to become the longest-tenured leader since Gerald Bouey in the 70s and 80s.
“I am going to need to say something about my future plans. That point will come, we’re not there today,” he said. “I still got a good eight months. The Canadian economy, it’s at a very important juncture.” Some projects to get done include a new economic model and renewing the inflation-targeting deal with the government this year, he said.
Sep-21 23:15
The UK's low-hire, low-fire labour market justifies caution over further minimum wage hikes, particularly with regards to further closing the gap between pay for the young and other workers, a researcher at the Institute for Fiscal Studies told MNI, speaking ahead of the Low Pay Commission’s next advice on minimum wages changes in October.
"It makes sense to be more cautious now because we know that it's a soft labour market," Xiaowei Xu said.
Governments have previously accepted the recommendations of the LPC, whose remit compels it to proposed adjustments on the National Living Wage and the lower National Minimum Wages for those under 21. The government is committed to removing the gap between the NLW and NMW, but the LPC can be flexible over the pace of equalisation.
In line with the last round of LPC recommendations, the government increased the youth wage by 8.5% earlier this year, more than double the 4.1% increase in overall minimum pay. Unemployment among young people aged 16 to 24 has jumped from last year, with much-criticised data from the Office for National Statistics putting the rate at 16.4% up from 14.3% a year ago, but Xu said there is so no clear evidence that increases in the minimum wage have increased joblessness.
"That there's no evidence that changes in minimum wage rates so far have led to a dis-employment effect, is not the same thing as saying that we should continue raising minimum wage rates going forward," she said.
BUDGET TIMING
Minimum wage increases have interacted with other recent changes to employment law and taxes, making their effects hard to disentangle, Xu noted. The LPC’s job is also complicated by the fact that it has to arrive at its recommendations without knowing what is coming in the autumn budget.
The LPC’s 2024 recommendation was made without any knowledge of the big increase in employers’ national insurance contributions which was announced at that autumn’s budget and was enacted in 2025, with a disproportionate impact on lower-paid workers, she noted.
This year, once again, the LPC "is making this recommendation without knowing what's coming in the Budget ... that could really affect what it thinks the right rate should be," Xu said.
The LPC estimated the NLW from April 2027 will see a 3.7% rise within a wide range of 2.4% to 5.0%, and its final recommendations will be made before end October. The budget is set for Oct 28.
The Bank of England's most recent estimate of inflation target-consistent wage growth was around 3.25% and policymakers have repeatedly cited likely 2027 pay growth as key to assessing whether second round effects are materialising. The minimum pay rise announcement comes before the Monetary Policy Committee's November meeting, at which it is increasingly expected to hike its key policy rate.
EMPLOYMENT RIGHTS
The Employment Rights Act 2025, which rolls out through 2026 and 2027, will also restrict employers' freedom to compensate for higher minimum wages by cutting hours, Xu noted.
Restrictions on the use of zero-hours contracts, which promise no minimum working time to employees, will be in force from 2027, and Xu warned that these may have a marked effect on employment. Jonathan Haskel, now head of the official fiscal forecaster, the Office for Budget Responsibility, has previously highlighted such risks. (See MNI INTERVIEW: Employment Law Hit To UK Productivity - Haskel).
"There is evidence from the U.S. that increases in minimum wages increase self-employment" as companies change structures to bypass the rise, and "that might happen even more here with the Employment Rights Bill because it's not just the minimum wage that incentivises self-employment," Xu said.
Sep-21 15:06
You are invited to listen to a Livestreamed MNI Connect Video Conference with ECB Executive Board Member, Piero Cipollone.
Details below:
- Speaker: ECB Executive Board Member,Piero Cipollone.
- Topic of discussion: ‘Money in the Digital Age: Digital Euro, Tokenisation and the Role of Central Banks’
- Date: Tuesday 6 October from 1400-15.30 London/0900-10.30 ET/15:00-16:30 CET
- This event will be run as a Zoom Webinar and is a public, on-the-record event.
To register please go to: MNI Webcast Registration
The U.S. Federal Reserve’s rate hikes will have little impact on future People's Bank of China monetary easing, despite the widening interest-rate differential, as robust exports continue to support the yuan and boost speculation on a stable-to-appreciating currency against the greenback.
The Loan Prime Rate held steady on Sunday at 3.0% for the one-year maturity and 3.5% for the five-year tenor and over, unchanged now for 16 consecutive months. Both rates fell in May 2025 by 10 basis points after the PBOC lowered the 7-day reverse repo rate and the reserve requirement ratio.
Following the Fed’s rate hike last week, the China-U.S. 10-year Treasury yield spread reached a historic high of 331 basis points. However, the yuan has appreciated consistently over the past two years, despite the continuous widening yield gap, supported by robust exports that now appear to have overtaken domestic fundamentals as the currency’s primary driver.
Simultaneously, China's technological edge and the temporary cessation of the U.S.’s trade war have further reinforced expectations of a stronger currency.
The dollar is also expected to depreciate – despite elevated U.S. Treasury yields – fuelled by investor concerns over Washington’s fiscal sustainability, Fed independence and a restructuring global order, which will further support the yuan.
YUAN PERFORMANCE
Tan Xiaofen, a professor at the School of Economics and Management of Beihang University, told MNI that in the short term, the yuan-dollar pair is expected to move in a range from 6.60–6.90, appreciating moderately to 6.50–6.70 in the medium term, with two-way fluctuations falling within a gradual upward trend over the longer term. High U.S debt levels will feed a long-term trend for dollar weakness, favouring a stronger yuan, he said. (See MNI: Yuan Seen Appreciating Gradually Over Next Five Years)
On Friday, both onshore and offshore yuan strengthened past the 6.70 per dollar mark, hitting their highest level since January, 2023 after the PBOC set a stronger yuan central parity rate for an eighth consecutive trading session, marking its longest winning streak since 2023.
Sun Bin, chief analyst at China Foreign Exchange Investment Research Institute, said over the medium to long term, the yuan’s trend is clearly to strengthen within the PBOC’s managed framework, with the mid-point of the yuan-dollar pair likely to appreciate by CNY0.2 to CNY0.25 per year on average. He predicted the currency could break through the 6.0 level over the next four to five years.
The yuan is likely to break free from the dollar further as the proportion of dollar-denominated assets in the country’s forex reserves declines, and as Chinese monetary policy is increasingly set according to the needs of the domestic economy, Sun said. The impact of fluctuations in the dollar index has shifted from a trend-setting factor for the yuan to a source of short-term volatility, he added. (See MNI: China To Further Cut U.S. Treasury Holdings, Advisors Say)
U.S. TREASURIES
A backdrop of accelerating global de-dollarisation and growing U.S. debt strains has put China's U.S. Treasury holdings in a long-term, gradual downward channel, according to Tan, who expects China's U.S. debt allocation to glide toward a baseline around 15% of total forex reserves, down from 18.5% in July 2026 and 37% in 2018.
He said China will continue to trim its exposure to longer-term Treasuries, while increasing allocations to short-term Treasury bills, inflation-protected securities, and floating-rate instruments.
China has not rolled over some maturing bonds, which has predominantly driven the overall reduction, avoiding large active sales, advisors noted.
Sep-21 01:22
A plan put forward over the summer by Spanish Finance Minister Carlos Cuerpo, backing the conversion of some eurozone government debt into European Union bonds in order to boost the liquidity of the latter looks unlikely to go very far, EU sources told MNI.
A recent meeting of senior Euro Area finance officials in Brussels expressed serious reservations towards the proposal.
"Many member states said there are a lot of open questions, from others there was outright rejection. The impact on national issuance is a major concern especially for small member states or member states outside the euro area," said one national finance official. (See MNI: EU Safe Asset Plan Sees Positive Feedback-Spain Says)
It is not clear if the proposal would become a "political process,” another senior EU official said.
"The technical work is ongoing. There is no political process ongoing on the matter right now. Whether or not it develops into a political process right now remains to be seen. At this point we are looking at the technical details and trying to understand what is being proposed."
Sep-18 15:00
The Bank of England's decision to retain about a quarter of the gilts in its Asset Purchase Facility is a large step in the right direction but it has room to go further and may end up doing so if the repo markets expand too far, former BOE Executive Director Markets Paul Fisher told MNI.
The BOE stated on Thursday that GBP120 billion of gilts, out of the APF’s total book value of GBP448 billion, will be retained to back banknotes, the Bank’s largest liability other than for central bank reserves. However, with GBP99 billion of banknotes in circulation, this puts an artificial upper limit on what it can hold, according to Fisher.
"I'm very supportive of what they've done. I think it makes a lot of sense. They could go a bit further," he said. "They haven't given themselves the option of holding a non-monetary gilt portfolio on Banking Department … which they could do."
Banking Department holds all BOE assets and liabilities not tied to banknotes. According to Fisher, the concept of backing banknotes works in a formal and legal sense, but is essentially “smoke and mirrors,” as the idea that gilts are hypothecated to specific liabilities is fictitious.
"Once you do a consolidated set of accounts for the Bank of England … you've got some liabilities which are mainly reserves and banknotes, and you've just got a bunch of assets which include lending via repo to the banking system and holdings of gilts," he noted. (See MNI BOE WATCH: MPC Holds With Hawkish Twist, Slows QT)
DEMAND-LED SYSTEM
The BOE has shifted to a system under which it meets demand for central bank reserves via repos, which could involve very large amounts of gilts as collateral.
They "want to be able to expand repo in a crisis (not just QE), and it's messy, right? Because people have got to be sure they can get the cash and the systems have all got to work," said Fisher, now in academia with posts at Cambridge and Warwick universities among others.
Rather than retaining a quarter of the APF gilts, "personally, I would have just done it, say, 50-50" he said.
"They could hold more gilts. They may be right. Who knows? I just think they'll start to wince a bit if the level of reserves stays where it is, and they end up doing most of that in repo. That's going to be an eye-watering amount of repo.”
HANDING OVER TO DMO
The BOE also decided to end the practice of the MPC setting a gilt reduction target for the next 12 months each September, instead announcing a slower multi-year target. In addition, it opened the door to selling gilts direct to the government, so that the Debt Management Office can then dispose of them as appropriate. All of this makes sense, from Fisher's perspective.
Gilt market management is becoming trickier as digital gilts are coming ever more into the market, he noted. (See MNI INTERVIEW: BOE Very Near Stable Reserve Level - Fisher)
"You're also trying to navigate this shift away from pension funds buying long-dated gilts to buying more medium-dated gilts. Plus, the move to repo shortens the maturity a bit, " he said.
Now that the Bank is down to a settled level of reserves it is better just to have the DMO doing the selling, Fisher said. "It's very easy to trip the market up with two sellers."
As there are no first or even second order monetary policy implications from the BOE’s changes, the MPC can "focus on the interest rate" rather than gilt holdings, and work on the basis that "they (the MPC) don't need to worry about that, unless there is another shock in which case they will step in to change things."
The BOE's raft of announcements alongside its September monetary policy decision helped drive down longer date gilt yields, with 30-year yields falling over 10 basis points.
Sep-18 14:58
Bank of Japan Governor Kazuo Ueda signalled more rate hikes ahead but refrained from giving explicit hints as to their timing and pace after two Board members dissented against the BOJ’s 25-basis-point increase on Friday.
“I don’t have any specific timing,” Ueda told reporters following the BOJ’s first hike since June, which took the policy rate to 1.25%, its highest since 1995. “We will firmly discuss (policy) at every meeting,” Ueda added.
The rate hike was decided by a seven-to-two vote, with dovish board members Toichiro Asada and Ayano Sato, both nominated by Prime Minister Sanae Takaichi, dissenting.
The split vote triggered yen selling, but Ueda said that it was natural for board members to differ with regard to policy decisions.
“If all board members’ view were the same, [we] wouldn’t need to discuss [policy],” the governor said.
Two hawkish board members are set to conclude their terms in July 2027, when Takaichi is likely to appoint more doves as their replacements, potentially limiting the prospects for further tightening beyond that date.
UNCERTAIN NEUTRAL LEVEL
Policy decisions will depend completely on inflation data, Ueda said. While, in answer to questions, he declined to rule out measures such as a 50-basis-point hike or back-to-back rate increases, he noted that the BOJ should avoid tightening policy so much that it damages economic output. (See MNI POLICY: BOJ's Ueda To Strike Balanced Tone After Sept Call)
It is difficult for the BOJ to determine the neutral level of interest rates, Ueda said, adding that the Bank can only judge whether the policy rate has entered restrictive territory by monitoring economic activity and prices
While the BOJ is entering a new phase as underlying CPI inflation approaches the 2% target at which it must be anchored, this does not necessarily mean that the Bank is likely to accelerate the pace of rate hikes, Ueda said.
“The BOJ must now pay more attention to upside risks to prices than before, as financial conditions are accommodative,” Ueda said.
The BOJ continues to carefully monitor developments in the Middle East and their effects on energy prices, AI-related demand and foreign exchange markets in order to determine their impact on underlying CPI inflation. The next round of spring wage negotiations will also be a key factor for the BOJ, Ueda said.
Sep-18 09:11
The Reserve Bank of Australia is unlikely to hike its cash rate as much as current market pricing suggests, probably taking it up to about 4.85% but no more, despite the neutral rate drifting higher than the most recent estimate, the Bank’s former Chief Economist John Simon told MNI.
Implied market pricing for a 5% cash rate by August 2027 from today’s 4.35% is likely driven by a lack of clear guidance from the Bank, he said, though he added that the Board will hike the cash rate to 4.6% when it meets on Sept 29.
“Maybe that's [the market's] best guess, but we really need to see an explanation from the Bank of what their strategy is," he said. "For a long time, their strategy was do the minimum and really stretch this out. They're stepping away from that, but the question is, how far are they stepping away?”
Hiking as far as 5% would imply a dramatic reversal from the Bank's recent approach, according to Simon.
"I would be surprised if they got there, but certainly they need to be higher, and they needed to be higher two years ago. But the market always seems to project things into the future that turn out too extreme. [5%] feels a bit overdone, and maybe I'm sufficiently optimistic that I hope it's not necessary."
Senior Bank officials over the past two weeks have made hawkish comments, which Simon believes is driven by concern around inflation expectations drifting higher. (See MNI: RBA Comments Signal Tighter Policy Ahead - Ex Staff)
The Bank's past dovish strategy was framed within an optimistic Goldilocks scenario that required "a lot of things to go right," he added. "The stars haven't aligned as opposed to any one particular thing that has pushed them in the other direction," he continued.
Simon also questioned the Bank's resolve to keep the cash rate elevated for the time needed to ensure inflation moved back to the 2.5% midpoint target. "I wouldn't think based on past form that they have the patience to hold it there, which means that we may well be condemned to a stop-start inflation experience," he said, noting the Bank failed to contain inflation completely during its previous hiking cycle in 2023.
He called on Board members to offer their views more frequently to allow markets to understand their approach more clearly. "Unless they are dramatically more transparent and credible, I fear we'll just have a sequence of stop-start going into the future rather than hitting it on the head."
NEUTRAL RATE
Simon believes that the neutral level of rates has likely drifted higher driven by repeated supply shocks, and is close to 4.5%, about 50 basis points higher than the upper bounds of the Bank’s last estimate.
"In the past, neutral might be 3.5%, but the longer this has gone on, and particularly as we've moved from a savings glut to a savings drought – we've got huge capital demands around the world from governments and AI firms, and we've got a reduction in saving with lots of people retiring and suddenly starting to consume."
This drove a structural shift in the supply relative to the demand of capital in the economy, he added. "Which means that neutral rates are going up. But what that also means is that a restrictive policy rate is also higher than it was in the past, and I think that's really come home with the AI build out."
Sep-18 02:41
The Bank of England’s Monetary Policy Committee voted six-three for unchanged policy at its September meeting, as widely expected, but provided a hawkish twist with the swing voters tilting towards a near-term hike and the Bank also announced a slowing and complete overhaul of its quantitative tightening programme.
The vote to leave the policy rate steady at 3.75%, with Chief Economist Huw Pill and external members Megan Greene and Catherine Mann all again voting for a hike, contained no surprises. But a group of four swing voters, comprising Governor Andrew Bailey and his deputy governors, however, used varying wording to signal that with the geopolitical backdrop deteriorating and energy prices having risen they were open to hiking by as early as the next meeting in November.
In his policy paragraph in the minutes, Bailey said that if the Middle East conflict "persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten."
His three deputy governors all provided similar lines, with Sarah Breeden talking about it being "increasingly appropriate for Bank Rate to respond," Clare Lombardelli saying that "the case for building Bank Rate is building the longer the conflict continues," and Dave Ramsden citing a case for tightening.
That bloc of four, together with three votes in the bag for a hike, leaves the door wide open to a November hike.
SLOWER, REWORKED QT
In addition, rather than announcing a fresh round of gilt sales for the next 12 months as it has previously done, the Bank switched to a multi-year approach, with a sharp slowing in the planned pace of asset sales and a decision to hold a large quantity of the gilts acquired through quantitative easing to maturity.
The logic for a rethink of the Bank's QT strategy has been clear, as it removes the uncertainty generated by selling varying amounts of gilts each year into turbulent markets, but the Bank has moved more swiftly that expected to unveil a fully revamped approach. (See MNI INTERVIEW: BOE Very Near Stable Reserve Level - Fisher ).
The BOE will unwind its holdings at an average GBP46 billion per year, with just GBP20 billion of active sales annually, a step change down from its approach over the previous four years, during which it had reduced its gilt stock by an average of GBP87.5 billion a year with an average of GBP32 billion of active sales.
The long end of the gilt yield curve has been very volatile and the BOE announced that GBP120 billion of its longest-dated bonds, with maturities from 2049-2071, would be held to maturity and used to back bank note issuance. Another GBP222 billion of gilts set to be redeemed earlier than 2035 will be held to maturity.
The BOE also said that instead of auctioning gilts back into the secondary market it was working to sell them at market value to the government, leaving the Debt Management Office then in charge of decisions over future sales. The BOE's own APF auctions have been suspended, with a review due by April 2027. The changes effectively take the MPC out of the QE unwind process in the years to come. (See MNI INTERVIEW: BOE MPC Shouldn't Lead QT - ex-MPC's Saunders)
Sep-17 12:57About
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