Global Strategy Rates Map - The Odyssey for fiscal-financial stability

Research evidence excerpt

Global Strategy Rates Map - The Odyssey for fiscal-financial stability

g the resignation of Peter

Mandelson and pressure on former PM Starmer to resign (Figure 2Theextra20bpspremiumtohold10ygiltsislikelytotrendhigherfromincreasedlikelihodofmoredefencespending).

Reality of defence spending

Chapter 2 of the IMF's April 2026 World Economic Outlook warns that defence

spending can still lead to a persistent increase in inflation even if extra defence spending

is not done via additional borrowing. The IMF estimates that multipliers of defence

spending are close to 1, but vary with the degree of import leakage, financing mix,

capital spending and response of the central bank. Demand leakage through imports

remains a reality for most countries. Most countries import a large share of their military

equipment, with shares up to 80% for EU member countries. The IMF also studies the

case of Denmark or Poland where a substantial part of extra defence spending benefits

foreign producers rather than adding to domestic value.

Forecast errors of central banks

The persistence of oil price shocks matters for central banks, but we think that the ECB

will stick with a meeting-by-meeting approach. We still like receiving ECB Sep'26 v

Jul'26 with almost a full hike priced and see value in bunds if front-end Brent stays below

$110/bbl. That being said, central bank easing via either rates or balance sheet is harder

with inflation running at or above targets. It will be key for central banks to be

comfortable with their inflation forecasts. Figure 6One-yearaheadforecasterors(realisedinflation-forecastinflation)oftheECBandinflationswaps(percentagepoints) shows that the ECB's 1y inflation

forecast was running to close to realized outcomes again. The Fed's core PCE inflation