Global turning point: central banks prepare for extraordinary measures

Investment bank Julius Baer has published a comprehensive analysis of global monetary developments, indicating that major economies are facing a significant turning point. According to the bank, the combination of rising energy prices amid tensions and the war against Iran, coupled with stubborn inflation, is forcing central banks in Europe, Japan, and the United States to take rapid action, ranging from interest-rate hikes to extraordinary interventions in currency markets.

In the euro bloc, Julius Baer notes that the economy surprised on the upside with 0.4% growth in the second quarter of 2026; however, inflation accelerated to 2.9%, while core inflation rose to 2.5%. The sharp increase in energy prices, alongside continued rises in the services sector, reduces the European Central Bank’s ability to delay policy tightening. Markets are currently pricing in an approximately 85% probability of a rate hike in September.

In Japan, Julius Baer also identifies a significant shift. Although the interest rate remains at 1%, the governor of the central bank, Kazuo Ueda, has delivered a tougher message regarding the path forward. Consequently, the bank has brought forward its forecasts for interest-rate hikes to October 2026 and March 2027. Japan continues to move away from the ultra-easy monetary policy that characterized it for years, as inflation near 2% requires a faster response from policymakers.

At the same time, Julius Baer addresses the extraordinary intervention carried out by authorities in Japan and the United States in the FX market. The intervention, estimated at approximately 8.45 trillion yen, is considered the largest recorded in a single trading day and led to a sharp drop in the dollar’s exchange rate from 163.73 to about 157 yen per dollar. The bank emphasizes that this is only a temporary solution, and that sustained strengthening of the Japanese currency will be possible only if accompanied by further interest-rate hikes.

In the United States, analysts identify an additional focal point of uncertainty. An internal discussion is taking place within the Federal Reserve regarding the inflation index on which monetary policy is based. Beth Hammack, president of the Cleveland Fed, clarified that the 2% inflation target will continue to be based on the PCE index, following questions raised by statements from Fed Chair Jerome Powell. Julius Baer estimates that maintaining the existing index is essential for the central bank’s credibility and for reducing uncertainty in bond markets.

In summary, the bank notes that investors must closely follow central-bank policy developments, as the impact is expected to be significant on equity, bond, and FX markets. Rising energy prices, changes in interest-rate expectations, and the fight against inflation will remain at the center of market attention in the coming months.