No base case: Central Banks in a world of widening outcomes

That was the central message from Chatham’s Semiannual Market Update, hosted by Jackie Bowie and Amol Dhargalkar. As Jackie put it, "the variance of outcomes just got wider; there is no base case to anchor to.”

For much of the last 12 months, markets operated with a clear narrative: inflation would continue to fall, central banks would ease interest rates, and growth would come through, particularly in the resilient US economy.

That narrative is no longer valid. Also gone are concerns about the impact of tariffs—there are bigger risks to the global economy since the conflict in the Middle East started.

Rising vulnerability amid a more uncertain global outlook

Global growth is now very vulnerable, particularly in Europe and Asia. Europeans are facing another energy crisis with higher energy prices hitting already weak economies. Inflation, while lower, is still not at target for the US or the UK. It is not just about the risks to headline inflation; the bigger concern is whether inflation expectations begin to rise, potentially forcing central banks into a more hawkish stance. At the same time, the slowdown in growth could move us into stagflation territory.

In our webinar poll, 59% of respondents identified further geopolitical escalation as the biggest macroeconomic risk, far ahead of inflation or recession concerns. But beyond the ranking, the results point to a deeper shift: with geopolitics now dominating the outlook, respondents are struggling to gauge how much to worry about other macro risks. Inflation, growth, and policy remain top of mind, yet the range of possible outcomes has widened so significantly that defining a clear base case—and a clear baseline level of concern—has become increasingly difficult.

Central Banks respond

It was a busy week for central banks, marking the first round of decisions since the onset of the conflict—and the divergence in messaging underscores just how different their starting points are. The RBA moved ahead with a widely expected 25bps hike, a decision that likely would have come regardless of recent geopolitical developments. In contrast, the Bank of England struck a notably more hawkish tone, triggering a sharp rise in bond yields and ultimately prompting the Governor to issue a follow-up clarification.

More broadly, the idea of a synchronized rate cycle is continuing to break down. The Fed is still indicating cuts, the Bank of England is leaning hawkish, and others are navigating their own domestic constraints – Australia, Japan, Brazil. The result is an increasingly fragmented and less predictable policy landscape.

That lack of alignment is echoed in market expectations. When asked about the path of the U.S. 10-year Treasury, responses were almost evenly split between rates rising, falling, or staying the same. This dispersion is telling since it reflects not just uncertainty about the endpoint, but a much wider range of potential paths to get there. As Amol highlighted, it’s not just the destination that matters, it’s how you get there.

And that path now looks far more volatile.

Capital is still available, but becoming more selective

For now, capital markets remain open, but there are some sentiment shifts underway, unrelated to the conflict.

Multiple forces are converging at once: refinancing needs in a higher-rate environment, signs of stress in parts of private credit, and a massive wave of AI-driven infrastructure investment.

The scale of that investment is striking. Estimated digital infrastructure capex for 2026 alone exceeds $800 billion, which is about half the size of the total investment grade bond market in the US. This raises real questions about how markets will absorb that demand alongside everything else.

So far, most investors aren’t flagging access as the primary issue. Only 15% of poll respondents cited availability of capital as their biggest challenge, compared to 36% pointing to interest rate uncertainty.

But that may be exactly the risk. In crowded markets, capital doesn’t disappear, it becomes selective.

Timing, structure, and assessment of risk will determine who gets funded and on what terms.

AI is amplifying the competition for capital

AI is not just a technology story; it’s a capital allocation story.

Most organizations are engaging, but cautiously. Forty percent of webinar poll respondents are using off-the-shelf AI tools, while fewer are building internally or partnering externally. The constraint isn’t cost. It’s capability. Data quality and access (33%) and lack of internal expertise (23%) were cited as the biggest barriers to scaling AI.

Poll responses suggest that while AI adoption is clearly underway, it remains relatively surface-level—focused on leveraging third-party tools rather than deeply embedded, proprietary capabilities. The most frequently cited barrier, low-quality data, is telling; it highlights that the constraint is not the technology itself, but the underlying infrastructure needed to make it effective. In that sense, the hype around AI is not misplaced, but it may be premature.

The potential is real, but for many organizations, the value will only be realized once data foundations are strengthened, suggesting that near-term impact may fall short of expectations even as the case for longer-term transformation remains intact.

Hedging: from precision to resilience

Financial decisions are modelled around optimizing a base case—forecasting rates, timing markets, and structuring accordingly. That approach assumes a relatively narrow and measurable range of outcomes.

Today’s situation is very different. As Jackie noted, “you’ll never hit the perfect market point to execute.”

The goal is no longer to get the interest rate call exactly right, it’s to ensure your strategy works across very many different scenarios. That may mean acting earlier, building flexibility into hedging, or prioritizing certainty over waiting for potentially better pricing.

The Cut Through

For investors, borrowers and decision makers, this reinforces the premium on judgment. As the range of outcomes widens and data limitations persist, interpreting signals and translating them into actionable decisions becomes more challenging—not less. AI can enhance the toolkit, but it does not replace the need for disciplined scenario analysis and risk management.

In this environment, a structured approach to market exposures, supported by independent perspective, can help cut through the noise, ensuring decisions remain grounded even as the data, and the tools built on it, continue to evolve.