Central banks on hold, outlook evolving

This week central banks didn’t do anything, and yet we all paid close attention. The US Federal Reserve, the Bank of England and the European Central Bank all left their policy rates this week – in line with market expectations. But beneath the headlines, the impact of the current conflict in the Middle East was clear in several ways. 

We can see it in terms of voting – in the US, the central bankers voted 11-1 in favour of keeping rates unchanged. Only Donald Trump’s appointee Stephen Miran continued to favour a cut. In the UK, policy-makers voted unanimously to keep rates unchanged, a shift from mid-February when four out of nine members favoured reducing rates. 

We can also see it in terms of forecasts. The US Federal Reserve released its latest economic projections. They now expect inflation in 2026 to reach 2.7%, compared to 2.4% at their last forecast in December 2025. Estimates from the ECB told a similar story. The ECB forecasts 2026 inflation of 2.6%, compared to an estimate of 1.9% back in December. The ECB also cut its 2026 growth forecast for the Euro-area to 0.9%, down from a forecast of 1.2% at the end of last year.

Market expectations for policy rates have shifted sharply. In the UK, for instance, investors now expect as many as three 0.25% rate hikes over the course of the next year. In the Eurozone, market expectations now reflect two rate hikes over the course of the year. 

In terms of the global economy, the likely impact of a prolonged period of higher energy prices should be higher inflation and slower growth – a challenging environment for policy makers. Of course, how long that might be is tough to know, but the greater the damage to energy infrastructure in the region, the longer it may take for supply to normalise even once hostilities cease. And we’ve seen expectations shift over the past few days, as investors consider a higher-for-longer scenario for energy prices. But part of the challenge is always just how quickly can sentiment turn. We’ve seen markets react quite swiftly to small indications that the fighting could subside. We’d argue that it makes short-term trading particularly difficult. 

It’s tempting to think about similarities with market experience in 2022, particularly on the fixed income side, but we’re wary of making too direct a comparison. Starting yields today (as of the end of February) were much higher compared to those at the end of 2021. We also suspect that central bankers will move more quickly this time around when faced with the prospect of higher inflation.

In terms of positioning, we’ve maintained a fairly cautious stance. In some portfolios we’ve reduced our exposure to longer-dated bonds, but we’ve so far kept our equity positioning largely unchanged. We’re conscious that bond yields have already moved higher, particularly in the UK, where 10-year gilts yielded close to 4.25% at the end of February and now sit close to 4.9%. The debate within the team currently is more focused on whether to add back to our exposure there.

We continue to monitor the evolving crisis and will continue to make changes to portfolios as needed.