Global Central Banks Super Week Concludes! Inflation Alarm Sounds - Rate Hike Wave Coming?

This week, the global central bank super week concluded, with meetings held simultaneously by the central banks of developed economies such as the United States, Japan, the United Kingdom, and Canada, as well as multiple emerging economies. The ongoing conflict in the Middle East continues to disrupt energy supplies, with price shocks affecting various industries, potentially suppressing economic growth and pushing up inflation levels. Policymakers worldwide are closely monitoring the situation, wary of the risk that this prolonged conflict could overturn the global economy.

Central Banks on High Alert

According to a summary by Yicai, in response to the surge in oil prices caused by escalating tensions in the Middle East, central banks of various economies that held meetings this week explicitly stated they are on alert. They are concerned that rising energy prices could lead households with reduced purchasing power to demand wage increases, potentially triggering a new wave of inflation across the economy.

The Federal Reserve decided to keep interest rates in the 3.50%–3.75% range with a vote of 11-1, while inflation expectations were revised upward. Fed Chair Jerome Powell stated at the press conference, “In the short term, rising energy prices will push up overall inflation, but it is too early to judge the scope and duration of their potential impact on the economy.” Powell did not see a greater risk of a weakening labor market compared to inflation threatening the Fed’s policy goals. This stance has delayed market expectations for rate cuts until 2027 and even increased the probability of a rate hike at the next meeting to 12%.

The European Central Bank (ECB) maintained interest rates at the March meeting but signaled readiness to raise rates if high energy prices push inflation higher. The ECB’s statement noted that soaring energy prices have led to an upward revision of the eurozone’s 2026 inflation forecast to 2.6%, well above the 2% policy target.

ECB President Christine Lagarde said that energy costs will have a “material impact” on inflation. “The Middle East conflict has significantly increased economic uncertainty, posing upside risks to inflation while also presenting downside risks to economic growth.” Data from the London Stock Exchange Group shows that the eurozone’s money markets are fully pricing in a rate hike in June. J.P. Morgan expects the ECB to raise rates twice in April and July.

Bank of England Governor Andrew Bailey, after the Monetary Policy Committee unanimously decided to keep rates unchanged, stated, “Monetary policy cannot reverse shocks to the supply side, such as energy.” He added, “However, monetary policy must respond to the risk of more persistent effects on the UK Consumer Price Index inflation.” After the decision, the UK 10-year government bond yield hit a new high since 2008, and the money markets have priced in three rate hikes this year.

As the first economy to enter a tightening cycle this round, Japan’s central bank governor Haruhiko Kuroda indicated that if the surge in oil prices proves to be temporary and does not hinder Japan’s ongoing inflation target achievement, there is a possibility of rate hikes in the short term. “It’s important to note that, amid the current situation, companies are actively raising wages and prices, which could mean they are passing on costs more aggressively than after the Russia-Ukraine conflict.”

Facing a new round of rising prices since late last year, the Reserve Bank of Australia (RBA) raised interest rates for the second consecutive time, pushing the cash rate to a 10-month high and warning that soaring oil prices pose a “material” inflation risk.

The Bank of Canada held steady, but Governor Tiff Macklem expressed a similar view: “If energy prices remain high, we will not allow their impact to spread and turn into persistent inflation.”

In emerging economies, Indonesia’s central bank kept the 7-day reverse repurchase rate at 4.75%. This hawkish hold is seen as a signal that the current easing cycle has ended. Bank Indonesia Governor Perry Warjiyo stated that the primary task is to stabilize the rupiah amid Iran-related conflicts and ensure inflation remains within target ranges.

Even Brazil’s central bank, which has among the highest interest rates among major economies, chose to cautiously cut rates by 25 basis points to 14.75%, with a smaller cut than market expectations.

Is Stagflation Increasing?

After the inflation surge following the COVID-19 pandemic in 2022, compounded by the intensification of the Russia-Ukraine conflict, central banks faced criticism for acting too late. Now, policymakers face the challenge of controlling prices without hampering already uneven economic growth, to avoid a stagflation scenario—characterized by high inflation and weak economic growth.

Stagflation is a detrimental combination of high inflation and sluggish economic growth, as it compresses corporate profits, causes declines in stocks and bonds, and limits monetary policy options.

Worrying trading patterns have emerged in the approximately $30 trillion US Treasury market, indicating increased concern about the economy and inflation. The two-year US Treasury yield has surged, while the 10-year yield has lagged, creating a bear-flattening shape. This pattern, where short-term yields rise faster than long-term yields, often signals that the Fed’s policy may tighten more than expected and that economic growth could slow or contract. As of Friday’s close, the spread between 2-year and 10-year yields narrowed from 74 basis points in early February to around 50 basis points.

The ongoing three-week conflict escalated again this week—Iran launched attacks severely damaging Qatar’s largest natural gas processing plant and targeting other energy facilities in the Gulf region in retaliation for Israel’s attacks on Iranian gas infrastructure.

Charles Chanana, Chief Investment Strategist at Saxo Bank Singapore, said, “This escalation marks a turning point for markets because it’s no longer just military news or the Strait of Hormuz blockade. It’s impacting the core of the global energy system. What’s unsettling markets now is the rising risk of stagflation.”

In contrast, Tom Hainlin, Investment Strategist at U.S. Bancorp Asset Management, believes concerns about stagflation are premature. “The Middle East situation could still evolve and reverse quickly. Right now, it’s more like a typical energy shock,” he explained. “Before high oil prices feed into inflation expectations, we don’t see this as a stagflation environment.”

Gary Shlosberg, Global Strategist at Wells Fargo Investment Institute, said, “The flattening yield curve clearly reflects market caution regarding Fed policy prospects and intensifies stagflation fears. But we believe this won’t resemble the stagflation of the 1970s. The risks of high inflation and economic weakness are indeed rising, but we expect this combination to be short-lived.”