Global Central Banks Super Week Arrives! Fed Rate Cut Faces Headwinds Amid War Shadows

Ask AI · How the Iran War Will Reshape Global Central Bank Policies

Cailian Press APP notes that this week, as major central banks hold meetings, they are facing a new round of inflation threats triggered by the Iran war. This situation may force them to delay rate cuts or even consider raising interest rates in some cases.

The changes have not yet occurred immediately: it is expected that the Federal Reserve, the European Central Bank, and the Bank of England will keep borrowing costs stable while assessing how much the surge in energy prices will pass through to consumer prices and economic growth.

However, for these three and the other 18 central banks (which regulate about two-thirds of the global economy), as they acknowledge the risk of another inflation shock, their policy tone will become more cautious.

Much depends on how long the conflict lasts — a factor difficult for markets to gauge. Investors wary of stagflation have been hit by oil price volatility and uncertainty over what U.S. President Trump will do next, raising questions about how quickly central bank leaders will respond to new price pressures.

Central Banks to Announce Rate Decisions This Week

Central Banks to Announce Rate Decisions This Week

It’s clear that global policymakers — still calculating the costs of U.S. tariffs and dealing with a fragmented geopolitical landscape — are reluctantly preparing to re-engage if necessary, to prevent the Middle East situation from reigniting consumer prices, weakening economic growth, or hijacking their currencies.

Economist Tom Orlik said, “Central banks can set interest rates, but they cannot reopen the Strait of Hormuz,” adding, “We expect Powell, Lagarde, Bailey, and their colleagues to keep rates unchanged, send warning signals, and hope the Iran war ends before it creates another unmanageable inflation problem.”

What’s causing heightened alertness is not just the Iran situation. Memories of the last inflation shock remain vivid — after the Russia-Ukraine conflict in 2022, some major economies experienced double-digit inflation. As then, it’s hard to estimate how long the fighting will last now.

Inflation Trends Vary, but Oil Price Rise Risks Affect All Countries

Inflation Trends Vary, but Oil Price Rise Risks Affect All Countries

Trump’s stance is unpredictable: on one hand, he says the war might “end soon,” but on the other, he claims the U.S. has “plenty of time” to strike targets from the air. Meanwhile, Iran’s new Supreme Leader, Ayatollah Khamenei, has vowed to keep the Strait of Hormuz — the energy transit choke point — effectively closed.

Lowering borrowing costs remains on the table — though not this month — as inflation risks from the Middle East are overshadowed by cracks in the U.S. labor market.

While markets no longer fully price in rate cuts in 2026, they still lean toward easing — making the U.S. an outlier among G7 peers.

In fact, with dissatisfaction over rising gasoline prices ahead of midterm elections, Trump has again called for rate cuts and even urged for temporary measures.

Morgan Stanley economists insist that rates will be cut by 25 basis points in June and September, noting that while rate hikes might be delayed, this could mean the Fed will need to take more aggressive action later.

German bank economist Christoph Balz said that even if oil prices stay high longer-term, “considering the political pressure to ease monetary policy — especially before the November elections — rate cuts are more likely than hikes.”

Diverging Rate Paths for the Fed, ECB, and Bank of England

Diverging Rate Paths for the Fed, ECB, and Bank of England

Europe’s situation is quite different. Despite growth risks, Europe remains firmly focused on inflation, and expectations for further easing have almost disappeared.

In the UK (where inflation topped 11% in 2022), just before U.S. and Israeli strikes on Iran, the probability of a rate cut in March was nearly 80%. Now, policymakers expect to hold rates steady. While some economists, including Goldman Sachs, still forecast rate cuts later this year, traders have begun to price in rate hikes.

Emma Moriarty, portfolio manager at CG Asset Management, said the UK faces a “classic stagflation problem.”

She said last Friday, “On one hand, the Bank of England needs to demonstrate resilience to keep inflation expectations anchored; on the other, raising rates risks further weakening already fragile demand.”

The 21-country eurozone shows somewhat more resilience, with better capacity to handle inflation rebound than last time. Officials expect to keep borrowing costs steady on Thursday, though some have hinted at possible future moves.

Fabrizio Barbon, senior eurozone economist at HSBC, said that the 2022 experience “may make the ECB more alert to the risk of de-anchoring expectations; if energy pressures persist, rate hikes could accelerate.”

Markets are betting the ECB will have to act, pricing in one or two rate hikes this year. However, only 7% of survey respondents expect any tightening.

In Japan, the likelihood of rate hikes is higher, as local inflation has exceeded the Bank of Japan’s 2% target for four consecutive years. Sources say that after holding steady on Thursday, a rate increase in April is not ruled out.

Like much of Asia, Japan relies heavily on Middle Eastern oil — over 80% of its eastbound cargo passes through the Strait of Hormuz. Prolonged high oil prices could severely impact inflation and economic expansion.

Research from Bargaev, Saktiyev, and Ziad Daoud models shows that a one-month blockade could push Brent crude to $105 per barrel, while a three-month closure could see prices near $164.

“The Strait of Hormuz will determine how things develop,” said Carsten Krüde, chief economist at M.M. Warburg & Co. “The bottleneck is real. Anyone ignoring it is ignoring the most critical transmission channel of this crisis.”

Some immediate rate actions may occur this week. Economists believe the Iran situation will prompt Australia to move its scheduled May rate hike forward to Tuesday, continuing the tightening cycle begun in February.

Tieri Weitzman, global FX and rates strategist at Macquarie, said, “As long as the war threatens inflation, central banks will remain hawkish. We expect this hawkish stance to persist even after hostilities end.”

Elsewhere, Brazil appears poised to cut rates on Wednesday, amid sluggish growth late last year and borrowing costs near 20-year highs. However, easing may proceed gradually, with some officials warning that “the war’s consequences cannot be ignored,” leading to divided market views on the size of the cut.

These examples highlight how the Iran war impacts economies at different stages of the cycle, requiring tailored responses that could significantly influence exchange rates.

Safe-haven flows have driven the dollar and Swiss franc higher, with pressure on the latter possibly prompting Swiss authorities to adopt a more hawkish stance on intervention language.

In Japan, officials face opposite issues: acknowledging economic risks could further weaken the yen. The yen has hovered around 160 per dollar — a level that previously prompted intervention in 2024.

In Indonesia, exchange rates are also a concern. Fuel subsidies may buffer inflation, but rising fiscal worries could lead to deficits widening, risking capital outflows and undermining efforts to stabilize the currency.

Given the diverse challenges caused by the war, policymakers’ responses will vary by economy and continent. The IMF says that with the timing of the conflict’s end uncertain, flexibility remains the top priority.

IMF Chief Kristalina Georgieva said, “If this new conflict proves to be long-lasting, it will likely impact market sentiment, growth, and inflation, posing new challenges for policymakers. In this new global environment, it’s essential to think about the unimaginable and be prepared for it.”