Where is the key interest rate headed?

Many major central banks around the world held their regular interest rate policy meetings last week. With the exception of the Reserve Bank of Australia, which raised its key interest rate by 25 basis points, no changes were announced. In statements from the ECB, the US Fed, and other central banks, it was noted that the risks of rising inflation and declining economic output have increased, though it appears too early to make a definitive assessment (Bloomberg, March 20, 2026). One thing is certain: The war in the Middle East has dramatically altered expectations regarding central banks. While in the early days of the war the closure of the “Strait of Hormuz” was the main anchor on which most considerations regarding a short-term rise in inflation hinged, since last Thursday the long-term impact has also come into focus due to the sustained damage to gas infrastructure.

Rising Expectations

As shown in the chart, market participants have already significantly adjusted their expectations for future developments. Put simply, the two lines represent where the respective policy interest rates are expected to stand following the ECB’s rate-setting meeting on December 17, 2026, and the U.S. Fed’s meeting on December 9, 2026. Taking the ECB as an example, this expectation hardly changed in the first two months of the year, and it was assumed that there would be no adjustments over the course of the year. Since the start of the war, the assumptions have initially shifted slightly upward and have risen sharply over the past two days, so that currently (Source: Bloomberg, 3/20/26, 12:30), three rate hikes of 25 basis points each are expected, bringing the rate to 2.75% over the course of the year. For the US Fed, the picture is very similar, albeit slightly more subdued, with the two expected rate cuts already priced in and no change anticipated through the end of the year for the time being.

Graph: Implicitly expected interest rate for selected central bank meetings
(Source: Bloomberg, own calculations, based on data from March 20th 2026)

Volatile Situation

As we have seen in recent weeks, the situation in this war, its duration, and its impact on the capital markets are changing very rapidly and are currently difficult to assess. Volatility has risen sharply, but is still far from the levels reached during the first months of Russia’s war of aggression against Ukraine or when the U.S. tariffs were announced last year. Daily fluctuations in stock indices, energy prices, and other indicators—even within a single day—range from sharp gains to equally sharp losses, depending on how new reports from the crisis region are received and interpreted.

Kathrein Investment Strategy

In a phase like this, it seems prudent to us to adopt a “wait-and-see” approach to investing, reduce risk, and take a more defensive stance. We have implemented this in our portfolios by setting the allocation between stocks and bonds at a neutral level. We have made our positioning more defensive in both asset classes, on the one hand by reducing interest rate and credit risk in the bond segment, and on the other hand through broader diversification in our equity investments.

This is a marketing communication from Kathrein Privatbank Aktiengesellschaft within the meaning of the Securities Supervision Act 2018 and is provided for informational purposes only. The purpose of this information is to provide a general overview of current market data and Kathrein’s market outlook; it does not constitute a direct or indirect recommendation for a specific investment strategy in the sense of a financial analysis. When investing in securities, price fluctuations due to market changes are possible at any time. Information and presentations relating to the past do not allow for reliable conclusions regarding future results. Despite careful research and compilation, no liability or guarantee can be assumed for the accuracy of the data.