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Major global stock market indices posted weekly losses as an escalating global trade war sparked risk-off sentiment. While risk appetite may have recovered somewhat following Friday’s rebound, investors will focus on interest rate decisions from the Federal Reserve (Fed), the Bank of Japan (BOJ), the Bank of England (BOE), the Swiss National Bank (SNB), and the People’s Bank of China (PBOC), navigating the market trajectory this week.

The odds are now turning to the more dovish stance of these major central banks. Trump’s tariffs and his efforts to reduce the US deficit increased the risks of a global economic downturn. A more accommodative monetary policy could provide a further opportunity for stock markets to rebound. Typically, a “Fed put” could help Wall Street to recovery from a correction territory.

The Fed to keep the rate on hold

The Fed’s rate decision is set to be the most critical event for the financial markets. The reserve bank has lowered rates by 1 full percentage point to between 4.25% and 4.5% in 2024. In January, it paused the easing cycle due to a resilient labour market and sticky inflation. According to money market pricing, the Fed will likely keep the interest rate unchanged until June, which is sooner than the previously projected September. Trump’s tariffs deteriorated the economic outlook as recent data suggested that consumer sentiment plunged to a two-year low in the US amid inflation concerns. Furthermore, the US consumer price index (CPI) came in cooler than expected in February, also supporting the case for a sooner rate cut.

While the Fed may express concerns about the economic outlook, it will likely emphasise the need for further evidence for sustainable cooling consumer prices. Hence, the bank’s guidance on its rate path will be a key driver for market sentiment. A dovish stance, or so-called “Fed put” may trigger a sharp rebound in the US stock markets, as occurred during Trump’s first term. This could also weaken the US dollar further and push up other currencies, particularly the euro.

The BOE may keep rates steady

The BOE is expected to keep the interest rate unchanged at 4.5% this week as inflation surged in January. However, the swaps rates show that the bank may cut the interest rate in May and August this year, more than previously projected, when only one cut was anticipated due to growth concerns in the UK.

Additionally, the need to increase defence spending in Europe and Germany’s fiscal reform increased the odds for the European Central Bank to keep loosening monetary policy, likely promoting the BOE to follow suit.

The British Pound surged against the US dollar, mirroring the trend of the euro on optimism toward increasing government spending. However, the sterling may have been overbought, facing risks of a correction in the near term.

The BOJ to hold off on rate hikes

The Bank of Japan will also likely hold onto its policy rate at 0.5% this week, pausing a hiking cycle that began in March last year. The BOJ raised the deposit rate for the third time in January, following hikes in March and June last year. However, Governor Ueda may express concerns about the economic impact of higher interest rates amid global trade uncertainties.

The Japanese Yen surged as being seen as a haven asset this year, while the BOJ’s rate hikes also provided a bullish factor. Japan’s inflation remained sticky in January, with the core CPI printing at 3.2%. However, it may not change the expectations for the bank to slow down its rate hikes due to tariff threats.

The SNB to lower the interest rate

The Swiss National Bank is widely expected to further cut interest rates by 25 basis points to 0.25%, making the fifth consecutive time reduction since March 2024. The SNB is the first major central bank to commence an easing cycle amid cooling inflation and slowing down economic growth. However, it might be the last rate cut in this cycle as the bank is unlikely to return its interest rate to negative territory.

China to hold rates unchanged

The People’s Bank of China (PBOC) will likely keep its key lending rates – the 1-year and 5-year loan prime rates- unchanged at 3.1% and 3.6%. However, Beijing is expected to impose further stimulus policies amid rising trade tensions against the US. In the government annual meeting earlier in the month, Beijing set its economic growth target at 5% and raised the deficit level to a three-decade high of 4%.

China is also set to release important economic data, including industrial production, retail sales, and fixed asset investment this week. These data will be critical indicators guiding the economic trajectory.