2. Trough interest rates in advanced economies; opportunities in emerging markets

Global economics and policy trends

2. Trough interest rates in advanced economies; opportunities in emerging markets

Policy interest rates are unlikely to fall much further in the main advanced economies in 2026, with a trough in rates expected during the first half. Elevated rates in several emerging economies are set to provide opportunities.

What are trough interest rates?
In economics, a “trough” is the lowest point in a business or economic cycle, following a decline and before a recovery. Trough interest rates occur when central banks have reduced rates to their lowest levels, often in response to economic downturns or recessions. The aim is usually to stimulate borrowing, investment and spending to help the economy recover.

Developed market rates
In all the major advanced economies, the scope for cutting interest rates in 2026 is limited. Policy rates are already close to what is considered the “neutral” rate – the level that neither stimulates nor restrains economic growth (Figure 2). Therefore, interest rates are likely to reach their lowest point (the “trough”) in the first half of 2026, after which further cuts are unlikely.

The Bank of Japan is expected to struggle to raise rates – at least until the middle of 2026. In Switzerland, rates are already at zero and Swiss National Bank President Schlegel has signalled the bar for reintroducing negative interest rates is higher than in the past. In the eurozone, interest rates are already close to neutral. The scope for UK rate cuts will be constrained by relatively sticky, above-target inflation, notably in the services sector. In the US, the range of estimated neutral rates remains hotly disputed but we doubt the Federal Reserve will reduce rates much below 3%, given strong real growth and inflation which is still sticky.

For those with memories of interest rates being at or close to zero in the recent past, such expectations will be disappointing. Very low interest rates would only make sense in the event of either a crisis situation, which hopefully is avoided in 2026, or one in which growth and the labour market are persistently weak, which we do not expect. On balance, we welcome the move to such neutral/trough rates as an indication that financial markets are behaving in a rational manner.

Politicised rate cuts
There remains, of course, the big question surrounding whether US Federal Reserve decisions become more politicised, with pressure for a large cut even if inflation remains above target and growth and unemployment remain resilient. On balance, we see the risk of that as small. It is not reflected in current market pricing, such as inflation break-even rates, or the expectations of current Fed board members.

If it did happen the central bank could well fail to achieve the apparent political objective of lower borrowing costs for households and businesses. A politicised cut in rates would likely raise longer-term interest rates (reflecting a higher risk premium and higher long-term inflation expectations) therefore negating the impact.

Opportunities in emerging economies
In several emerging and developing economies, real interest rates are particularly high when measured on the simple basis of comparing the policy interest rate to the latest inflation rate (Figure 3).

In these economies, it is important to consider two key factors. First, the risk that currency depreciation may offset the advantages of higher interest rates for investors. Second, the likelihood that inflation may not remain subdued could potentially affect real returns. In a general environment of a stable-to-weakening US dollar, the first risk seems contained for 2026. But the fact that the inflation-fighting credentials of many emerging economy central banks have yet to be fully established is a concern. On balance, we think these two risks are lowest in Brazil and favour money and bond market exposure in that market compared to other emerging market peers.

In Brazil, ten-year local currency bond yields are as high as 13.7%⁵, well in excess of the likely 4.0–4.5% inflation rate for 2026 and also above expected longer-run inflation trends. Brazil, however, may remain overshadowed by political tensions with the US.

In contrast, Mexico is likely to experience a greater boost to growth from a stronger US economy, which should also help support the peso. Additionally, since Mexico’s interest rates are closely aligned with those of the US, they are expected to follow any rate reductions.

Action for investors:

With interest rates expected to reach neutral, trough levels in the first half of 2026, there remains value in shorter- to mid-term duration exposure. This environment allows investors to borrow at the short end of the yield curve and invest further out to capture attractive carry opportunities.
Real rates in some emerging and developing economies remain elevated and provide opportunities but investors need to be wary of the risk of currency depreciation.
Look for opportunities in high-yielding emerging sovereign markets where there is the prospect of capital gains as long-term yields decline. Brazil, most notably, has high real yields in a slowing economic environment.
Mexico is set to be a beneficiary of a stronger US economy, which should support the Mexican peso.

⁵ Source: LSEG as at 03 October 2025.

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