Major global banks, including Goldman Sachs and ANZ, have revised their monetary policy forecasts for China, now largely ruling out interest rate cuts for 2026. This shift follows economic data pointing to stabilization in the world's second-largest economy. Goldman Sachs China economist Xinquan Chen cited China's resilience amid Hormuz disruptions, better-than-expected activity data, and a likely positive Producer Price Index (PPI) in March as reasons to remove their call for a 10-basis-point rate cut in the third quarter. ANZ also revised its outlook, stating it no longer expects rate cuts in 2026 or 2027 as growth remains "within target."
Concurrently, traders have begun repricing expectations for a U.S. Federal Reserve rate cut following a ceasefire agreement between the United States and Iran. According to CME Group's FedWatch tool, the probability of a rate reduction by year-end jumped to approximately 43% from just 14% before the ceasefire announcement. The market now implies the benchmark rate could fall to around 3.5% by December from the current 3.64%.
The shift in Fed expectations is driven by an easing energy and inflation outlook. Prior to the ceasefire, the conflict had pushed energy prices higher, raising concerns about inflationary pressures derailing the Fed's 2% target. Krishna Guha of Evercore ISI noted the market is now discounting a "clear skew to one cut" from the Fed this year, suggesting the repricing has further to go. Guha also indicated easing could extend to other major central banks like the Bank of England and European Central Bank.
Investor focus now turns to key U.S. inflation data, including the PCE price index and March's Consumer Price Index (CPI), which will capture the impact of rising energy prices during the conflict. Despite the improved outlook, analysts caution that the situation remains uncertain, dependent on the durability of the ceasefire and incoming economic data.
