Global Central Banks at a Crossroads: Will the 2022 Inflation Nightmare Return?

Source: 21st Century Business Herald Author: Wu Bin

In 2022, the supply gloom brought by the COVID-19 pandemic had not yet dissipated, when the Russia-Ukraine conflict suddenly erupted, and inflation shocks were still fresh in memory. Although price increases in major economies reached double digits at the time, institutions like the Federal Reserve and the European Central Bank once confidently believed in a “transient inflation” theory. Their delayed responses ultimately led to persistent high inflation, drawing widespread criticism of their policies.

Four years later, a similar scene is unfolding again. The Iran-U.S. conflict has caused oil prices to surge past $100, igniting a new inflation storm. This week, about 20 central banks worldwide will hold monetary policy meetings, covering nearly two-thirds of the global economy. Among the G10 central banks, eight will announce their decisions this week. With the renewed inflation threat from the Iran-U.S. conflict, many central banks may be forced to delay rate cuts or even consider raising interest rates in certain cases.

However, policy adjustments are not imminent at this moment. Besides the Reserve Bank of Australia, which is expected to raise rates again, the Federal Reserve, the European Central Bank, and the Bank of England are all likely to keep rates steady while assessing how soaring energy costs will impact consumer prices and economic growth. Future monetary policy will largely depend on how long the Middle East conflict persists. If the situation again pushes up prices, hampers economic growth, or causes sharp currency fluctuations, central banks are prepared to intervene at any time.

Will the 2022 inflation nightmare repeat itself this time? Will global central banks make the same mistakes again?

The Iran-U.S. conflict ignites a new inflation puzzle

Amid rising oil prices, the Federal Reserve, European Central Bank, and Bank of Japan are set to announce their rate decisions this week, with investors closely watching for key signals.

Wu Qidi, director of the Xunda Information Securities Research Institute, told the 21st Century Business Herald that under the backdrop of rising oil prices driven by the Iran-U.S. conflict, central banks face a dilemma between controlling inflation and maintaining growth. Currently, a “data-dependent” approach has become common among major central banks. It is highly likely that they will keep rates unchanged this week, but their policy guidance will collectively turn hawkish to prepare for possible tightening later.

Market expectations are that the Federal Reserve will hold rates steady, but the outlook for rate cuts has shifted significantly. The dot plot may show only one rate cut this year, with officials assessing the risk of stagflation. The European Central Bank is also expected to keep rates unchanged but may signal a hawkish stance to stabilize market confidence in inflation targets, possibly raising rates once this year. The market expects the Bank of Japan to maintain current rates, but rising energy prices and imported inflation could accelerate its future rate hikes.

Dong Zhongyun, chief economist at AVIC Securities, analyzed that the ongoing Iran-U.S. conflict has driven a sharp surge in global oil prices and expectations. Brent crude has already broken through $100 per barrel, with futures prices staying above that level. Just over two months ago, Brent was only $63 per barrel. The rapid increase in oil prices injects significant uncertainty into the already slowing global inflation trend.

More critically, the direct trigger for this round of oil price surges is Iran’s blockade of the Strait of Hormuz, with future shipping expectations depending on the evolving geopolitical game among the U.S., Iran, and Israel. The enormous geopolitical uncertainty, with the Strait’s closure as a transmission tool, makes the evolution of global inflation even harder to predict. Dong noted that since the conflict only started half a month ago, the actual inflation impact has yet to fully manifest. For major central banks, maintaining a “wait-and-see” stance until clearer inflation data emerges is a rational choice, adopting a “data-dependent” approach.

Regarding the Fed, ECB, and BOJ, their situations differ.

For the Fed, Dong emphasizes that weak labor market data combined with rising oil prices make it difficult to achieve both inflation control and economic stability simultaneously. The key message this week will likely be extreme policy patience and a rebalancing of dual objectives. Powell may stress that the soft February employment data needs further observation to determine if it signals a trend, while the inflation risk from rising oil prices cannot be ignored. This stance, which considers both employment and inflation data, suggests that market expectations for rate cuts should be postponed. The Fed is also likely to signal that it is not considering rate hikes now or in the near future, trying to balance hawkish inflation concerns with dovish employment worries.

For the ECB, given its higher dependence on external energy and the fresh memory of the 2022 energy crisis triggered by the Russia-Ukraine conflict, the ECB’s signals are expected to be more hawkish than the Fed’s in response to the Middle East conflict’s imported inflation. If energy prices remain high, the ECB may further tighten its stance to counter inflation risks and keep policy options open.

As for the Bank of Japan, rising oil prices pose a classic stagflation shock—higher import costs push up imported inflation, but soaring energy costs also damage economic growth and corporate profits. Dong predicts that the BOJ’s signals will be the most cautious and contradictory. On one hand, with the yen plunging toward 160 and the risk of losing control over inflation, a hawkish rate hike might be needed to stabilize the currency. On the other hand, aggressive rate hikes could trigger a fiscal crisis given Japan’s high government debt, and would not solve supply-side energy shortages. The BOJ is expected to remain cautious, emphasizing that the current inflation is a “temporary supply shock” and relying on government fiscal subsidies rather than monetary policy to offset energy costs, while warning against excessive yen depreciation.

Divergence among major central banks

The Reserve Bank of Australia became the first major developed market bank to raise rates this year on February 17, leading Japan. On March 17, the RBA announced a 25 basis point hike to 4.10%, marking its second consecutive rate increase this year.

Wu Qidi said that the rate hike reflects Australia’s resilient economy. Q4 2025 GDP grew 2.6% year-on-year, exceeding the 2% potential growth rate; January CPI rose 3.8% YoY, above the 2-3% target range; and the labor market remains low in unemployment.

However, internal debates within the RBA are evident. The decision was narrowly passed 5-4, revealing deep divisions over economic outlook. Doves worry that excessive rate hikes could dampen already fragile consumption and growth. This suggests future rate hikes will be highly data-dependent, with possible policy swings depending on incoming data.

Dong believes Australia’s early rate hikes stem from its unique economic situation—unlike other major economies, which show demand slowdown after successive hikes, Australia’s economy remains notably resilient. Its inflation is driven more by domestic demand, business investment, and a robust labor market, rather than solely by imported energy prices. Therefore, the RBA’s rate hikes are driven by the need to address domestic inflation, with Middle East geopolitical events merely exacerbating this necessity rather than being the primary cause.

Market expectations are that the RBA will continue raising rates, while the BOJ and ECB may also hike this year. The Fed, however, is unlikely to raise rates further. This divergence highlights the complex, multi-dimensional outlook for global monetary policy.

Australia’s case underscores that the current global central bank landscape is characterized by multi-faceted divergence rather than a simple hawkish-pessimistic versus dovish-optimistic dichotomy.

Dong emphasizes that for the Fed, lacking Australia’s economic resilience or Europe’s urgency to combat imported inflation, it remains in a dilemma of “pause on rate hikes” amid inflation and recession risks—becoming a typical “data-dependent” central bank.

The ECB faces a different challenge: its economic outlook is weaker than the U.S., but it faces more direct energy shocks. If the ECB is forced to hike during a slowdown due to imported inflation, it would resemble a stagflation scenario similar to 2022, but with a worse demand backdrop.

The BOJ’s situation is the most fragmented. On one hand, yen depreciation to 160 exacerbates imported inflation, suggesting a need to hike to stabilize the currency. On the other hand, high government debt constrains aggressive hikes, risking fiscal crises. The BOJ’s policy dilemma is balancing currency stabilization and fiscal sustainability.

Fundamentally, Dong argues that the core reason for this divergence among central banks lies in their different economic positions in response to the same geopolitical shocks.

The divergence in monetary policies stems from structural differences. Wu notes that the root of the current divergence is the varying inflation pressures and growth drivers across economies. The Eurozone, as a net energy importer, is highly sensitive to oil shocks, increasing pressure to hike rates to curb inflation. The Fed faces a “stagflation” dilemma—raising rates risks inflation, cutting rates risks employment—thus it remains cautious, waiting for more data. Japan’s situation is dominated by rising energy prices and yen weakness, with rate hikes aimed at normalizing policy and easing currency depreciation.

Will the 2022 inflation nightmare return?

In 2022, the Russia-Ukraine conflict caused major economies’ inflation to reach double digits. If the Iran-U.S. conflict persists longer, will the inflation nightmare of 2022 reoccur?

Comparing the two, Dong sees similarities: both occur near critical turning points in central bank cycles—2022 at the start of tightening, now in the middle of easing; both are driven by energy supply shocks directly boosting inflation expectations.

However, the global economic contexts differ significantly. Dong notes that first, the demand environment is different. In 2022, the Russia-Ukraine conflict hit during a period of overheated demand and high inflation post-pandemic, with supply shocks amplifying inflation. Currently, global demand is not overheated but relatively weak, which suppresses supply-driven inflation transmission. Second, policy space varies. Despite painful rate hikes in 2022, central banks still had room to tighten further to fight inflation. Now, after multiple rate cuts, major economies are not in an overheated demand state, leaving less room for further hikes. Third, policy coordination has shifted from unity to divergence. In 2022, high inflation led to a consensus on rate hikes, but now, due to differing economic cycles and external conditions, central banks are diverging.

Therefore, Dong believes the probability of a 2022-style inflation nightmare repeating is low. The more likely scenario is that major economies are stuck in a stagflation trap of wanting to hike but being unable to. However, if the Strait of Hormuz blockade extends beyond expectations and geopolitical tensions escalate, it could still trigger unexpected inflation shocks—an important tail risk to monitor.

Wu Qidi also believes that compared to 2022’s Russia-Ukraine conflict, the macro environment has fundamentally changed, making a repeat of the inflation nightmare less likely.

The initial inflation environment differs greatly. Before 2022, pandemic-related supply chain disruptions and large U.S. fiscal stimulus pushed inflation to 40-year highs. Currently, U.S. CPI growth has been on a downward trend since late 2025, with a very different starting point.

Energy’s weight in inflation has also declined. Over recent years, service sector inflation has increased, and energy’s share in CPI has decreased. The energy transition has also reduced oil price elasticity. Past experiences in 2022 have made central banks, especially the ECB, highly alert to inflation caused by energy shocks, which will influence market expectations and policy behavior.

Looking ahead, Wu warns that the key variable is the duration and intensity of the Iran-U.S. conflict. If the Strait of Hormuz remains blocked long-term, it could lead to a severe energy supply crisis, raising inflation and constraining growth simultaneously. In such a scenario, central banks will face a more complex environment and difficult policy choices.

The misjudgment of “transient inflation” in 2018-2019 is still fresh in memory. As the world faces a crossroads again, can policymakers transcend past inertia and find a narrow path for a soft landing amid stagflation? The challenge is already here.

(Edited by: Wen Jing)

Keywords: Inflation