Some of the world’s leading central banks are set to meet this week against the backdrop of rising geopolitical tensions and a renewed surge in energy prices, with policymakers facing a familiar dilemma: whether to prioritise growth or respond to the risk of resurgent inflation.
The Federal Reserve, European Central Bank, Bank of England and Bank of Japan will hold scheduled policy meetings on Wednesday and Thursday.
Their assessments of the economic fallout from the escalating conflict in the Middle East are expected to be closely watched by markets.
The war, triggered by US-Israeli strikes on Iran, has disrupted global energy flows, including the closure of the Strait of Hormuz, a key artery for global oil shipments.
Iranian attacks on energy infrastructure across the Gulf have further intensified supply concerns, sending oil and gas prices sharply higher.
The surge has raised fears of a repeat of the inflation shock that followed the Russia-Ukraine war, when energy costs rippled through global economies, lifting prices and squeezing household incomes.
RBA outlier, but Fed, ECB, BoE, and BoJ expected to hold rates
Most major central banks are expected to keep interest rates unchanged this week, reflecting the high degree of uncertainty surrounding the duration and intensity of the conflict.
An exception has been the Reserve Bank of Australia, which raised interest rates for the second consecutive month on Tuesday.
The central bank lifted rates by 25 basis points to 4.1%, with five of its nine policy board members voting in favour of the move.
“In large part, higher interest rates reflect expectations for the path of monetary policy, which have risen in Australia and most other advanced economies in response to the expected inflationary implications of the conflict in the Middle East,” the RBA said in a statement on Tuesday.
The central bank said that while Australia might be an ‘outlier’ in raising rates, the Iran conflict had “heightened” concerns about inflation.
In contrast, policymakers in the US, Europe, the UK and Japan are expected to adopt a wait-and-watch approach as they assess whether the shock proves temporary or persistent.
Federal Reserve weighs growth against inflation risks
The Federal Reserve is widely expected to leave interest rates unchanged at the conclusion of its two-day meeting on Wednesday, with markets pricing in a 99.1% probability of a hold, according to the CME FedWatch tool.
The central bank faces a complex backdrop.
Recent labour market data from the Bureau of Labor Statistics has sent mixed signals, with strong job growth in January followed by weakness in February.
Inflation had shown signs of easing in recent months, but the latest data does not yet capture the recent spike in oil prices.
Analysts say policymakers are likely to remain cautious until there is greater clarity on whether the economic impact of the war will be more pronounced on growth or inflation.
Steve Englander of Standard Chartered said the Federal Open Market Committee is unlikely to signal a clear policy direction at this stage, given the uncertainty surrounding the conflict.
Meanwhile, political pressure has added another layer of complexity.
Donald Trump has urged Fed Chair Jerome Powell to cut rates, arguing that the current environment warrants monetary easing.
However, economists say the central bank is likely to defer any action until more data becomes available, particularly as rising energy costs begin to feed through into broader inflation indicators.
ECB faces renewed inflation vigilance
In the eurozone, the European Central Bank is expected to hold its deposit rate at 2.0% at its upcoming meeting.
However, the sharp rise in energy prices has significantly altered the risk outlook.
Economists at UniCredit said inflation expectations will be critical in shaping the ECB’s response.
If elevated energy prices persist and begin to influence wage-setting behaviour or longer-term expectations, the ECB may shift its focus more decisively towards price stability, even at the expense of economic growth.
Markets are already pricing in the possibility of nearly two quarter-point rate hikes this year, reflecting concerns that the inflation shock could prove more durable than initially expected.
The central bank is also keen to avoid repeating the missteps of 2022, when it underestimated the persistence of energy-driven inflation following the Ukraine war.
As a result, analysts expect a more hawkish tone, with policymakers emphasising vigilance and readiness to act if necessary.
Bank of England balances weak growth and rising prices
The Bank of England is expected to keep interest rates unchanged at 3.75% when it announces its decision on March 19.
The UK economy presents a challenging mix of rising inflation risks and weak growth.
Official data showed that economic output stagnated in January, falling short of expectations for modest expansion.
At the same time, higher energy costs linked to the Middle East conflict have raised the prospect of a renewed uptick in inflation, complicating the policy outlook.
Futures markets, which had previously anticipated a rate cut, have sharply revised expectations.
The probability of a March rate cut has dropped to less than 2%, down from around 80% before the conflict escalated.
Analysts say the Bank is likely to adopt a cautious stance, waiting to assess how the energy shock filters through the economy before making any policy adjustments.
Bank of Japan remains focused on gradual normalisation
The Bank of Japan is also expected to leave policy unchanged, maintaining its benchmark rate at around 0.75%.
Japan’s heavy reliance on imported energy makes it particularly vulnerable to rising oil prices.
Further increases could weigh on economic growth while adding to inflationary pressures.
However, policymakers have indicated they will not respond hastily to supply-side shocks.
Deputy Governor Ryozo Himino recently said it would be prudent to assess underlying inflation trends before adjusting policy, noting that monetary measures take time to influence the economy.
The central bank is expected to reiterate its gradual approach to policy normalisation, with further rate increases contingent on sustained improvements in growth and inflation.
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