Interest Rate Monthly Outlook - 4th July 2025

Executive Summary

Last month, we spoke about uncertainty surrounding tariffs. This month, we have certainty that there will be tariffs, which leaves market participants trying to estimate the impact on growth and inflation. As a result, many central banks have taken a ‘wait-and-see approach’ with the ECB and Fed holding in their rate decision. The expectation is that these tariffs will negatively impact growth forecasts across the globe which has flattened forward curves. There has also been increasing questions surrounding developed markets’ debt and how they will pay their deficits. This used to be domain of EMs, but the focus has recently shifted. This can be seen in the EM debt spread over the US (1.04%) which is now the lowest since 2007. This has coincided with a rise in DM swap rates across most tenors as expectations are that rates will not fall as far or as fast as previously expected. Our spotlight this month is on Japan

United States

What have we seen?

In the June CPI, we saw a rise in goods’ prices which looks set to continue with the previous jobs data on the soft side. As a result, The Fed chose to hold rates during its most recent meeting at the end of July. There were two board members who dissented (in favour of a 25bp rate cut) citing different interpretations over the state of the labour market.

What to expect?

Over the coming month, the expectation is that Trump will seek to coerce trading partners into ‘deals’ and as such there will be a lot of tariff-related noise. It seems that markets will look past this. The negotiation to watch is China. They are the US’ key trading partner and a change in effective tariff rate has the potential to significantly change US economic outlook

Eurozone

What have we seen?

Eurozone growth came out as 0.1% this quarter, a tick higher than expected (0% QoQ). The EU heavyweights underperformed since they are all net exporters. Tariffs (and their uncertainty) will likely continue to hit the area hard, although we are told the ECB has been modelling some of the slowdown already

What to expect?

Now that the trade framework has been agreed, there is hope that businesses will have some certainty around the cost of tariffs and the impact on supply chains. The weakening growth outlook has changed the shape of the Euribor forward curve. There has been a flattening over the short-term and a steepening over the long term. This change followed hawkish comments from the ECB and disappointment with the outcome of the trade framework with the US.

United Kingdom

What have we seen?

An important move in the UK rates market has been a steepening of the term premium. Over the previous month, 2Y rates have moved by 6bps but the 30Y has moved by 18bps. This suggests that there is a risk premium being priced in by the markets. A view that was backed up by the higher-than-expected borrowing in June.

What to expect?

There is a BoE meeting that is happening on the 7th of August. The current implied OIS curve, forecasts a 90% chance of a rate cut. This is mostly in response to a weakening jobs market. The other side of the equation, inflation is proving particularly tricky to shake. This could delay the cut or alter the rate–cutting cycle that has been priced in.

Markets Spotlight

Japan

Japan has been in the news, first, because of the trade deal with the US and, secondly, because there have been some significant moves across their yield curve. There has been broadly a 20bp rise and a steepening of the term premium. On 15.07, the 10Y hit its highest level since 2008. This is significant for a country whose debt-to-GDP sits at 216%. This rise represents an increased fiscal risk premium and investors’ concerns about the LDP’s election loss and the spending plans of the opposition. The BoJ held rates on Thursday at 0.5% but raised inflation expectations for the fiscal year to 2.7% (up from 2.2%). This indicates that we may be at the beginning of a rate hike cycle which would likely coincide with a rise in the Yen too

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