Central Banks Signal Tight Policy While Geopolitical Risks Temper Outlook
Top central banks struck hawkish tones as the Iran war drove energy prices sharply higher but acknowledged that the sheer uncertainty over the impact on the global economy called for caution in their next policy moves.
In a rare coincidence of the monetary policy diary, central banks of the United States, Japan, Britain, Canada and the euro zone – effectively the Group of Seven (G7) nations – convened this week, as have counterparts from several emerging economies.
Having barely tamed a commodities-led inflation spike after Russia’s full-scale invasion of Ukraine in 2022, policymakers are determined to rein in any new price pressures without derailing still-patchy economic growth.
The U.S. Federal Reserve and the Bank of Canada on Wednesday both opted to hold interest rates steady, as did the Bank of Japan on Thursday. Yet they made clear they are on alert, wary that rising energy prices could spark a fresh wave of inflation.
“In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy,” Federal Reserve Chairman Jerome Powell said after the Fed’s 11-1 decision to hold rates in the 3.50%-3.75% range.
Yet Powell’s reluctance to say that risks of a weakening job market posed a greater risk to the Fed’s objectives than inflation helped push market rate-cut expectations into 2027.
In Tokyo, Bank of Japan Governor Kazuo Ueda said the BOJ would not rule out a near-term rate hike if the expected hit to growth from surging oil costs proves temporary, and does not derail progress in durably hitting the bank’s price target.
“We need to be mindful that recent developments come at a time when companies are already actively pushing up prices and wages, which suggests they could pass on costs more aggressively than after the war in Ukraine,” Ueda told a news conference.
Bank of Canada Governor Tiff Macklem struck a similar note: “If energy prices stay high, we will not let their effects broaden and become persistent inflation,” he said.
“This latest escalation feels like a turning point for markets because the conflict is no longer just about military headlines or Strait of Hormuz closure,” said Charu Chanana, chief investment strategist at Saxo in Singapore.
“It is now hitting the plumbing of the global energy system. What is unsettling markets now is the growing stagflation risk… It means this is no longer just a geopolitical story but a macro one.”
Reporting by Promit Mukherjee in Ottawa, Howard Schneider in Washington and Leika Kihara in Tokyo; Writing by Dan Burns and Mark John; Editing by Lincoln Feast, Shri Navaratnam, Alexandra Hudson
This article was first reported by Reuters
