As concerns grow that inflation in each country could surge again if energy supply disruptions from armed clashes in the Middle East persist, the European Central Bank (ECB), the Bank of England (BOE), and the Bank of Japan (BOJ) all kept their benchmark interest rates unchanged on the 19th local time. Including the U.S. Federal Reserve (FRB) the previous day, Central Bank policymakers around the world all chose to hold.
Financial experts said the successive hold decisions show how sensitively Central Banks that must both curb inflation and support economic growth are reacting to variables stemming from the Middle East. If the Middle East energy crisis drags on, the rate-cut tailwind that corporations and investors had expected will in effect become difficult.
On the day, ECB President Christine Lagarde said at a press conference after holding rates, "Uncertainty over the economic outlook has expanded significantly due to the ripple effects of the Middle East situation, and the risks of inflation and recession coexist." Lagarde added, "We are closely watching the risk that rising energy prices could spill over into other goods and services across the board."
At the same time, the ECB raised this year's inflation forecast to 2.6 percent, far above the 2% target. It also presented a pessimistic scenario that if Iran continues to choke off the Strait of Hormuz and supply chain disruptions persist, inflation next year could surge to 4.8 percent.
The situation is similar for the Bank of England. The financial sector had initially bet that the Bank of England was likely to cut rates this month. But as the Middle East crisis flared, Bank of England Monetary Policy Committee members unanimously held rates at this month's meeting. Bank of England Governor Andrew Bailey warned, "If war conditions continue in the Middle East, household energy bills will be heavier in the second half of this year."
The Bank of Japan, which had been trying to exit a tunnel of negative rates that lasted for more than a decade, was also hobbled. Initially, expectations had grown that the Bank of Japan was likely to raise rates. But given the Japanese economy's absolute dependence on energy imports, the surge in oil prices is increasingly likely to erode consumer purchasing power and worsen corporations' profitability. Bank of Japan Governor Kazuo Ueda offered a general position, saying, "The key variable is how Japan's economy will be affected by the intensifying situation in the Middle East," and, "We will choose appropriate response measures considering the pass-through of price increases and the extent of economic deterioration."
The U.S. Central Bank, the Federal Reserve (the Fed), also decided to hold rates the previous day. The Fed maintained a cautious stance even as the Trump administration kept pressuring it to lower rates. Federal Reserve Chair Jerome Powell said, "It is still too early to assess the potential impact and duration of soaring energy prices on the economy."
As Iranian airstrikes intensify and key energy infrastructure across the Persian Gulf, including Saudi Arabia, Qatar, and the United Arab Emirates (UAE), comes under successive attacks, international crude and natural gas prices are swinging out of control. Brent, the international oil benchmark, approached $120 per Barrel, and European natural gas prices at one point jumped 35 percent. Rising energy prices push up inflation while increasing corporations' production expense, slowing economic growth. With the Strait of Hormuz—through which one-fifth of the world's oil shipments pass—effectively blocked, not only energy but the transport costs of other major goods are also soaring in tandem.
European countries experienced harsh inflation, with the inflation rate topping 10 percent at times, when natural gas supplies from Russia were cut off after Russia's 2022 invasion of Ukraine. Central Bank policymakers worry that this situation could recur. Many major Central Banks have made price stability their top priority and have begun reconsidering or scrapping their planned rate-cut schedules for this year.
Given the situation, experts said Central Banks are tending to maintain the current tightening stance and watch developments rather than hastily cutting rates. Some have pivoted to respond quickly. Australia's Central Bank recently raised its policy rate to a record high for the first time in 10 months, saying the inflation risk from the surge in oil prices has materialized. Brazil's Central Bank lowered rates but delivered a smaller-than-expected cut, taking a cautious approach.
Charu Chanana, a chief investment strategist at Danish investment bank Saxo, told Reuters, "This situation is shaking the foundations of the global energy system," adding, "What makes markets most uneasy is the growing risk of stagflation."