Middle East conflict reignites inflation concerns, will "Super Central Bank Week" rate decisions "hang in the balance"?

This week, approximately 20 central banks around the world are holding monetary policy meetings, with the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan taking turns.

The Middle East conflict has entered its third week with no signs of easing, and the crucial shipping route through the Strait of Hormuz remains at a standstill. Oil prices, after breaking the $100 per barrel mark for the first time since 2022, have only slightly declined due to supply concerns and then rebounded. This has reignited fears of global inflation, affecting the global central banks’ expected rate cuts earlier this year.

Against this backdrop, industry insiders estimate that nearly two-thirds of the world’s economies, including seven major economies such as the US, Eurozone, UK, Japan, Canada, Australia, and Switzerland, will announce interest rate decisions this week. The Reserve Bank of Australia will hold its meeting on March 17, followed by the highly anticipated Federal Reserve meeting on March 18-19. On March 19, the Bank of Japan, Swiss National Bank, Bank of England, and European Central Bank will also make their decisions.

Federal Reserve Faces Dual Uncertainty

Market consensus expects the Fed to keep rates unchanged this week. The combination of “negative non-farm payrolls” and “oil prices breaking 100” has created a conflict for the Fed’s dual mandate—maintaining price stability and maximum employment—making the short-term rate outlook uncertain. Before the rate announcement, the US will release the Producer Price Index (PPI) for February, another key indicator of inflation. Meanwhile, weaker-than-expected February non-farm payrolls have raised concerns that the US labor market may cool faster than anticipated. If economic growth slows further or unemployment rises significantly, the Fed may act sooner than expected.

Amid this dual uncertainty, traders are almost unanimously betting that the Fed will hold rates steady at the upcoming meeting, with about a 40% chance of at least one rate cut later this year.

LPL Financial Chief Economist Jeffrey Roach wrote in a report: “Inflation will be affected by the war, and unemployment will be influenced by labor market turbulence. Therefore, we expect the Fed to emphasize uncertainty in these two areas of its mandate.”

RSM Chief Economist Joe Brusuelas expects the Fed to temporarily ignore volatile energy costs but admits the situation could change. “If inflation expectations start to rise, the Fed will be reluctant to repeat the mistakes made during the pandemic when the Russia-Ukraine conflict triggered energy shocks,” he said.

Goldman Sachs currently predicts that the Fed will start cutting rates later than previously expected, with cuts of 25 basis points in September and December. Earlier forecasts suggested the easing cycle could begin as early as June, but recent oil price surges have complicated inflation outlooks.

Morgan Stanley economists reaffirm their forecast of 25 basis point rate cuts in June and September, noting that while rate hikes may be delayed, the impact of geopolitical conflicts is often short-lived, which could mean the Fed will adopt a more aggressive easing stance later this year.

Deutsche Bank also believes that even if oil prices remain high for an extended period, the political pressure on easing—especially ahead of the November elections—makes a rate cut more likely than a hike.

Japan’s Early Rate Hike Expectations

Japan’s central bank, often seen as an outlier among global central banks, is widely expected to keep its policy rate at 0.75% this week but will reaffirm its commitment to normalizing monetary policy. Many analysts believe the Bank of Japan will continue raising rates later this year. If inflation remains stable, the policy rate could reach around 1.00% by mid-2026. Market focus will be on Governor Ueda’s comments after the meeting to gauge the likelihood of a rate hike in April.

A survey from March 5-10 showed that over a third (37%) of 51 economists predict the BOJ will hold steady this week but may raise rates again in April, up from 17% two months ago.

Additionally, before the Middle East conflict escalated, overnight index swap markets implied a roughly 68% chance of a rate hike in April, despite some hawkish comments from officials and economic data exceeding expectations. Many respondents believe that although high oil prices could harm Japan’s economy, they might also boost inflation expectations if the current economic conditions align with BOJ forecasts. Japan relies almost entirely on imported oil, over 90% of which comes from the Middle East.

Ryutaro Kono, Chief Japan Economist at BNP Paribas, stated in a survey: “If Japan’s economic outlook does not worsen, Ueda is likely to reaffirm his intention to raise rates at the post-meeting press conference. As long as the Middle East situation stabilizes, the basic expectation remains for a rate hike in April.”

Beyond the Middle East and inflation dynamics, Prime Minister Fumio Kishida’s views are also crucial for the BOJ, especially given his consistent support for monetary easing. Last month, Kishida’s government nominated two scholars—Toichiro Asada and Ayano Sato—who advocate for re-inflating the economy, as new BOJ board members. About 80% of economists believe this appointment indicates Kishida’s inclination to slow the pace of rate hikes. Asada will join the board in April, and Sato in June.

However, markets also expect the BOJ to avoid signaling a too “dovish” stance, as slowing the normalization process could further weaken the yen. Over half of surveyed economists believe Kishida will find it difficult to prevent the BOJ from raising rates, as doing so might lead to further yen depreciation.

A new round of Middle East geopolitical tensions has pushed USD/JPY back toward 160, the highest since July 2024 and a key psychological level. Japanese Finance Minister Shunichi Suzuki said on March 16 that, with the yen weakening sharply and approaching 160, authorities are prepared to take decisive action if necessary to stabilize the currency. This level has historically been a trigger point for intervention. On that day, USD/JPY hovered around 159-160.

Tsuyoshi Ueno, Chief Economist at NLI Research Institute, commented: “Kishida’s new appointments suggest he is not seeking to accelerate rate hikes. The BOJ is likely to act only after carefully accumulating sufficient evidence to justify a move. But if the yen depreciates excessively, they may hike as early as April.”

Divergence in Other Central Bank Policies

The market generally expects the European Central Bank to keep rates unchanged, but the Middle East conflict has nearly overturned ECB President Christine Lagarde’s previous stance of a “cautious” policy, as inflation remains a primary concern compared to the Fed’s dual mandate. Recent surges in energy prices have fueled expectations of an earlier rate hike by the ECB, prompting the ECB Governing Council to clarify how inflation risks have changed and how far their policy stance is from market expectations.

The 2022 Russia-Ukraine conflict triggered a European energy crisis. At that time, the ECB drew attention for resisting rate hikes amid market pressure. Lagarde last Tuesday stated that the ECB will ensure that the Middle East conflict does not cause the same severe inflation shocks as the Russia-Ukraine war. “Our economic situation now is different, better, and more capable of handling shocks. We will take all necessary measures to keep inflation under control and prevent a repeat of the inflation spikes of 2022 and 2023,” she said.

While the ECB aims to avoid repeating past mistakes, it is unlikely to rush into rate hikes. Lagarde also said last week: “There are too many uncertainties now. I cannot predict exactly what decision we will make at the March 18-19 policy meeting. Whatever we decide, it will not be rushed, given the high level of uncertainty and volatility.”

Similarly, after the 2022 Russia-Ukraine conflict, the UK faced a severe energy shock. The Bank of England responded with significant rate hikes to curb soaring inflation.

But this time, the situation is different. Four years ago, the UK unemployment rate was at a 48-year low, wages were growing at the fastest pace in this century, households had pandemic savings to spend, and the government was stimulating demand. Now, unemployment is rising, vacancies are falling, economic growth has stalled, and both monetary and fiscal policies are restraining activity. Data released last Friday showed the UK economy unexpectedly contracted in January, risking growth below the Bank of England’s 0.3% Q1 forecast.

Simon French, Chief Economist at Panmure Gordon, said: “This is not a replay of 2022.” Economists at ING and RSM UK believe that if recent surges in oil and gas prices persist, UK inflation could rebound to more than twice the Bank’s 2% target.

Based on this, markets expect the Bank of England to hold rates steady on Thursday and possibly hint at whether it will consider a rate cut later. Before the Middle East conflict, the nine-member Monetary Policy Committee supported a 25 basis point cut to 3.5%, and markets had expected further easing later this year. Currently, expectations for rate cuts have been completely withdrawn, with traders generally expecting the base rate to rise back to 4% by December.

Among other central banks, the Reserve Bank of Australia was the first major developed market to hike rates this year, citing persistent price pressures and excess demand amid constrained supply. Data since then has reinforced the resilience of the Australian economy, while the Middle East conflict has heightened concerns over domestic inflation. The RBA will announce its latest cash rate decision this week, with markets pricing in a high chance of a second hike. Investors will also watch Governor Philip Lowe’s post-meeting statement for signals that February marked the start of a new tightening phase.

Markets expect the Swiss National Bank to keep rates at 0%. UBS economists note that two opposing forces are balancing each other: rising global energy prices pushing Swiss inflation higher, and a strengthening Swiss franc helping to lower imported inflation.

With overall inflation hovering near the central bank’s 2% target, markets expect the Bank of Canada to hold its policy rate at 2.25% on Wednesday. However, similar to the UK, the upcoming employment data on Friday is a concern. Markets anticipate that the data could show the largest monthly decline in employment in Canada in over four years.

The Riksbank is expected to keep its benchmark rate at 1.75% on Thursday, consistent with previous signals. The Swedish economy remains resilient, and inflation has fallen below the 2% target. New economic forecasts and revised rate paths will be closely watched, as investors consider whether the Middle East conflict might cause the Riksbank to change its view that the next move will be an interest rate hike next year.

Brazil’s central bank, before the Middle East conflict, was almost certain to start easing policy: policymakers had already indicated in January that a rate cut in March was their baseline expectation, supported by domestic deflationary pressures. Previously, markets expected a 50 basis point cut this week, but ongoing conflict has reduced expectations to 25 basis points. Some analysts believe the cautious Brazilian central bank is considering holding rates at 15%.

Indonesia’s central bank is also expected to keep rates at 4.75% this week, balancing the need to maintain rupiah stability against concerns over rising consumer prices. While fuel subsidies could ease inflation, such measures might also widen the deficit amid fiscal worries, potentially leading to capital outflows and complicating efforts to stabilize the currency.