July Edition 03: What are the implications of central banks’ policy decisions?

Each month, we discuss key issues facing investors. In this edition, we explore the implications of central banks’ policy decisions.

Key takeaway: Following a rate cut pause in June amid tariff and policy uncertainties, the FOMC is expected to resume easing in September. Despite concerns about the US fiscal deficit, US Treasuries are still fundamentally resilient. Yet, rate volatility warrants a neutral stance for now. While the Bank of England reinforced a gradual approach to easing, we expect another 1.25% of rate cuts from this easing cycle and remain positive on UK gilts for their attractive valuations against a backdrop of slowing growth. While a potential rate hike in October is likely, Japanese government bond (JGB) yields remain unattractive.

What are the implications of central banks’ policy decisions?

The FOMC left policy rates unchanged at 4.25-4.50% in June, with growth expectations lowered to 1.4% and inflation up from 2.8% to 3.1% for 2025 amid tariff and policy uncertainties. We expect the FOMC to resume rate cuts in September, followed by two 0.25% cuts in December and next March, taking the federal funds target range to 3.50-3.75% by end-2026. Despite concerns about US fiscal deficit and debt implications, we believe the Treasury market is still fundamentally resilient, but rate volatility supports a neutral stance on US Treasuries and investment grade credit, with a preference for 7-10-year duration and taking spikes in yields as opportunities to add exposure.

The Bank of England maintained its Bank Rate at 4.25% and reiterated a gradual and cautious approach to easing, flagging a ‘significant slowing’ in pay growth and job market momentum. We maintain an overweight stance on UK gilts, where valuations look compelling against a backdrop of slowing inflation and weakening growth.

The Bank of Japan also kept its policy rate steady at 0.5% in June and decided to reduce its JGB purchases by half to JPY200bn per quarter from March 2026 onwards. With more clarity on the JGB buying plan, market attention will likely shift to the timing of the next rate hike, which we expect to occur in October. We remain underweight on Japanese government bonds.

Bonds saw a safe-haven bid despite higher inflation expectations and US deficit concerns

If you missed it, read our views on where investors can unlock sector opportunities for diversification.

Subscribe to our newsletter to get access to our monthly investment house views. For the full report, please visit your local HSBC Website > Wealth Insights > Investment Monthly: Building multi-asset resilience against geopolitical uncertainty

*Disclaimer: This article is for information purposes only and does not constitute and should not be construed as legal, tax or investment advice or a solicitation and/or recommendation of any kind from HSBC to you, nor as an offer or invitation from HSBC to you to subscribe to, purchase, redeem or sell any financial instruments, or to enter into any transaction with respect to such instruments. The views presented are based on the HSBC Global Investment Committee at the time of preparation and are subject to change at any time according to global economic conditions. You may choose to check our latest views at your discretion and should not rely on this document as investment advice. If you have concerns about any investment or are uncertain about the suitability of an investment decision, you should contact your Relationship Manager or seek such financial, legal or tax advice from your professional advisers as appropriate. You should not make any investment decision based solely on the content of any document. Please refer to the full disclaimer of the HSBC Investment Monthly report – visit your local HSBC Website > Wealth Insights and access the full report.