Citi Research analysts suggest that the Federal Reserve might not require the aggressive interest rate hikes currently anticipated by the market. Despite forecasting global headline inflation at 3.5% for the year, the bank notes that long-term inflation expectations remain stable, indicating continued investor confidence in central bank policies.
The bank reports that Brent crude prices hover near $105 per barrel, contributing to a global inflation forecast that is nearly one percentage point higher than initial projections. Diesel prices have surged by nearly 50% more than crude oil, while gasoline costs have increased by approximately 20% more than the underlying commodity.
Since February, Citi has raised inflation forecasts for major economies by about 50 basis points. Among the 27 central banks monitored by the institution, 20 now maintain higher rate forecasts than they did earlier this year. Concurrently, 10-year government bond yields in many nations have climbed by 60 to 100 basis points.
The Fed’s current estimate for the neutral rate stands at 3.2%, which is 70 basis points higher than the level recorded in early 2024. Citi identifies rising neutral rates and increased investment in artificial intelligence, which relies heavily on long-term credit markets, as primary drivers for the current upward trend in global yields.
In Asia, Citi projects that the Bank of Japan will implement three additional rate hikes by the end of 2027, potentially raising its policy rate to 2%. The bank also observes that capital expenditure related to artificial intelligence is impacting technology supply chains across South Korea, Taiwan, and China.
