Top central banks from the US, Canada and Japan struck hawkish tones on Wednesday, albeit to different degrees, as the Iran war drove energy prices sharply higher amid a pivotal week of global central bank meetings.
Having battled a commodities-led inflation spike after Russia’s full-scale invasion of Ukraine in 2022, policymakers are again walking a tightrope, reining in stubborn price pressures without derailing growth.
The US Federal Reserve, the Bank of Canada and Bank of Japan all opted to hold interest rates steady, but their leaders made clear they are on alert, wary rising energy prices could spark a fresh wave of inflation.
“Governing council will look through the war’s immediate impact on inflation, but if energy prices stay high, we will not let their effects broaden and become persistent inflation,” Bank of Canada governor Tiff Macklem said in opening remarks at a press conference after the bank kept its key rate at 2.25%.
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.
— US Federal Reserve chair Jerome Powell
US Federal chair Jerome Powell was equally cautious.
“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,” Powell said in a press conference after the Fed’s 11-1 decision to maintain its benchmark overnight interest rate in the 3.50% to 3.75% range.
Powell’s reluctance to say 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.
Brazil’s central bank was a dovish exception on Wednesday as it kicked off a long-awaited easing cycle with a cautious 25-basis-point cut in its benchmark rate to 14.75%, which is among the highest in major economies.
The central bank decisions came after the Reserve Bank of Australia hiked rates to a 10-month high and warned of a “material” risk to inflation from the oil price spike.
Stocks slid and oil prices rose sharply on Thursday after a major escalation in the US and Israel’s war with Iran rattled investors, while the Bank Of Japan (BOJ) became the latest central bank to warn about the impact of energy costs on inflation.
BOJ governor Kazuo Ueda said the central bank 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 Japan was making in durably hitting the bank’s price target.
“We need to be mindful that recent developments come at a time when companies are 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.
However, analysts expect the rate path for central banks to remain bumpy with no clear end in sight to the conflict that could upend global supply chains, jolt financial markets and hurt corporate sentiment.
“This latest escalation feels like a turning point for markets because the conflict is no longer only about military headlines or Strait of Hormuz closure,” said Charu Chanana, chief investment strategist at Saxo in Singapore.
“It is hitting the plumbing of the global energy system. What is unsettling markets is the growing stagflation risk. It means this is no longer only a geopolitical story but a macro one.”
Reuters
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