With uncertainty in global financial markets growing due to the aftermath of the Iran war, major Central Banks in the United States, Europe, and the United Kingdom are all expected to maintain a rate-hold stance. As energy prices surge and concerns about an economic slowdown rise at the same time, the direction of monetary policy also appears adrift.
The U.S. Federal Reserve (Fed) is highly likely to hold the benchmark interest rate at its monetary policy meeting on the 29th (local time). Markets expect the Fed to maintain the view that it will watch a while longer how the war affects the economy. The Financial Times (FT) reported that the Fed appears set to again emphasize its dual mandate of maximum employment and low inflation.
The Fed's policy outlook has swung sharply in recent days. Before the war, expectations were priced in for two to three rate cuts within the year, but after oil prices surged due to the war, even the possibility of a rate hike was raised. Forecasts then shifted again, and the market now sees about a 50% chance of one rate cut by mid next year. This meeting is highly likely to be Chair Jerome Powell's last. That is because Kevin Warsh, nominated as successor by U.S. President Donald Trump, is currently undergoing confirmation.
The European Central Bank (ECB) is in a similar position. The ECB is almost certain to hold rates for the seventh consecutive time at its meeting on the 30th. President Christine Lagarde and other policymakers have stressed that it is still too early to assess how the recent surge in energy prices will affect inflation and growth. BNP Paribas assessed that since March the ECB has clearly toned down its hawkish messaging.
However, the possibility of a rate hike has not completely disappeared. Price pressures in particular are a variable. Eurozone inflation in April is forecast to rise to an annual rate of 2.9%. That is well above the ECB's medium-term target of 2%. Meanwhile, with signs of slowing growth, concerns are being raised that the eurozone economy is approaching the risk of "stagflation." Nomura assessed that this situation is forcing the ECB into a difficult choice. Raising rates can curb prices but may deepen the slowdown, while keeping rates steady could allow inflationary pressures to persist.
The United Kingdom's Central Bank, the Bank of England (BoE), also has a high likelihood of holding rates. The current benchmark rate of 3.75% is expected to be maintained, while some policymakers are raising the need for a slight increase. The Bank of England plans to present economic outlook scenarios in this meeting that reflect the Iran war. With energy prices continuing to rise, the possibility of rate hikes could come back into focus, drawing market attention.
Experts expect major Central Banks to remain in "wait-and-see mode" for the time being. Dani Stoilova, an economist at BNP Paribas, said, "If necessary, they will keep the door open to rate hikes, but the message will be that the monetary policy committee is not yet rushing to raise."