Global Economic Weekly Hiking season in full bloom

Global Economic Weekly Hiking season in full bloom

Global Letter: Hiking season in full bloom 18 September 2026

As expected, the Fed hiked and communication was hawkish. Our view has been that Economics rate hikes were necessary in the US, and Warsh stated many of the reasons that we have Global argued: loose financial conditions, strong growth, the capex boom, a solid labor market, and inflation that remains too high. The bar for Warsh to out-hawk the market has Table of Contents become relatively high. But, especially outside the US, we think markets will sooner or Global Letter 2 later have to readjust their hike expectations lower, with initial conditions that are US 4 different from the post-COVID boom. Euro area 8

United States: Kevin Warsh and the parable of the Chinese UK 12

farmer Australia & New Zealand 14 Emerging EMEA 16 Fed hikes looked politically challenging a few months ago, but they increasingly seem Latin America 18 like an opportunity for Chair Warsh to burnish his legacy. We stick to our call for two Key forecasts 20 more, in Oct and Dec. The robustness of the nominal economy both increases the risks Detailed forecasts 21 of inflation persistence and reduces the risks that hikes will cause a recession. However, if supply shocks prove persistent, the Fed might eventually have to choose between an Research Analysts 27

extended inflation overshoot and a hard landing. Claudio Irigoyen Euro Area: Corporate health check – deteriorating Global Economist BofAS Our corporate health measure moved into “vulnerable” territory in 1Q26 and is likely to stay there in 2Q. Financing conditions and activity were the swing factors, adding to weak profits, especially in Germany and France. Antonio Gabriel Global Economist BofAS UK: BoE review – Hawkish hold, increasingly nervous The BoE was on hold, with 6-3 vote. Decisive hawkish shift with the BoE looking closer Global Economics Team to tightening, if the recent rise in energy prices is sustained. We keep our call of no hikes BofAS this year under review. Recent energy moves, if they persist, could make a hike in Nov. See Team Page for List of Analysts our base case. But we do view market pricing of close to four hikes as excessive.

Australia & New Zealand: Weathering El Niño El Niño often means hotter and drier conditions for Australia’s south and east. Nine of the ten driest winter-spring periods on record for Eastern Australia occurred in El Niño years, raising drought risk across key agricultural regions. New Zealand is more exposed than Australia, in our view.

Emerging EMEA: Kenya – Status quo until the elections Ruto remains the front-runner, but re-election is not assured. Article IV on track to be published in December; SLA before elections looks ambitious given Zambian precedent.

Latin America: Mexico – IG at stake We met policymakers, analysts and investors: IG at risk in 2-3y absent faster growth or consolidation. Banxico is unlikely to follow the Fed: sub-4% inflation, slack and a strong peso keep it on hold. A US-Mexico deal outside USMCA could land before the US midterms, cutting tariffs in exchange for tighter restrictions.

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Global Letter Claudio Irigoyen Antonio Gabriel Global Economist Global Economist BofAS BofAS

Hiking season in full bloom As expected, the Fed hiked and communication was hawkish. Despite opposing forward guidance, Chair Warsh delivered on what he signaled at Jackson Hole, which we saw as an overcorrection for his July presser. Our view has been that rate hikes were necessary in the US, and Warsh stated many of the reasons that we have argued: loose financial conditions, strong growth, the capex boom, a solid labor market, and inflation that remains too high.

We expect the Fed to deliver an additional 50bp of hikes in October and December. In turn, the market is already pricing the…