Major Central Banks around the world are leaning toward rate hikes rather than cuts. Even though international oil prices plunged after the United States and Iran agreed to a provisional end to the war, easing fears of inflation, Central Banks did not pivot their currency policy stance from tightening to easing. Analysts said a cautious view has spread among Central Banks that even if the war ends, the inflation shock that has built up will not unwind immediately.
When U.S. President Donald Trump announced a peace agreement with Iran on the 15th, the crude market reacted immediately. Brent, the global oil benchmark, fell to $78.96 a barrel, the lowest in three months. But the inflation pressure felt by the Central Banks in charge of currency policy remains strong. The Bank of Japan held a meeting on the 16th and raised the policy rate by 0.25 percentage points, from 0.75% to 1.0%. It is the highest rate in 31 years since 1995.
At the meeting, 7 of the 8 Bank of Japan policy board members supported a hike. In a statement, the Bank of Japan warned, "Higher crude prices are spreading quickly through corporations' transactions," and said, "There is a risk that the underlying inflation rate will exceed the 2% target." Underlying inflation refers to the basic trend of prices excluding volatile items such as food and energy. Deputy Governor Uchida Shinichi said at a briefing, "The basic policy is to continue raising the policy rate while adjusting the degree of currency easing."
The Bank of Japan also said it will cap the amount of Government Bonds it buys each month at 2 trillion yen (about 18 trillion won) starting in April 2027, and halt its reductions in bond purchases. This is the final step in normalizing purchases that once swelled to 23.7 trillion yen a month. The move is seen as signaling tightening through rate hikes while avoiding a scenario in which long-term yields spike due to a sudden cut in Government Bonds purchases. Harumi Taguchi, chief economist at S&P Global Market Intelligence, said, "Since bonds naturally roll off at maturity, the bank likely judged there is no reason to force reductions that would add volatility to rates."
Nobuyasu Atago, a former Bank of Japan official and chief economist at Rakuten Securities Economic Research Institute, said, "It is a very strong message that the Bank of Japan pinpointed the risk of underlying inflation exceeding 2%." He moved up the timing of the next rate hike from December to October. Atago said, "With such a clear signal and the simultaneous announcement of a rate hike and a halt to reductions in bond purchases, the June meeting could be recorded as a turning point in the future."
Other countries' Central Banks share a similar view. A clear "rate hike synchronization" is emerging as countries move in step under the goal of taming inflation. The European Central Bank (ECB) said after its currency policy meeting on the 11th that it will raise the deposit rate from 2.00% to 2.25% annually and raise both the main refinancing rate and the marginal lending rate to 2.40% and 2.65%, respectively. It is the ECB's first rate hike in 2 years and 9 months since September 2023. Gabriel Makhlouf, an ECB Governing Council member and governor of the Central Bank of Ireland, said, "If energy facilities are damaged, inflationary pressure can continue to linger." Experts said it will take considerable time to restore bombed oil and power facilities and to bring Hormuz shipping volumes back to normal. They noted that even clearing the mines laid by Iran could take a long time, leaving the shock in place for a while even after the war ends.
Norway's Central Bank took preemptive action by raising the policy rate to 4.25% on the 7th of last month. Australia's Central Bank kept the policy rate at 4.35% on the 16th, saying "inflation is still too high." The move is seen as a signal that price stability comes before signs of economic slowdown. New Zealand's Central Bank held rates while leaving room by saying, "Inflation could rise again due to the Middle East war and supply chain instability," and "faster and larger-than-expected rate hikes may be needed." The Bank of England is also expected to flag the possibility of additional hikes ahead of its meeting on the 18th.
The U.S. Federal Reserve (Fed) is holding a meeting through the 17th to decide rates. Experts think the Fed will hold rates this time. But the calculus has grown complicated. The United States has strong jobs and consumption, making inflation sticky. Clear signs of a cooling economy would be needed to justify cutting rates as the Trump administration wants. The U.S. economy is showing little sign of cooling. On Wall Street, many at the beginning of the year expected the Fed to cut rates soon, but sentiment flipped during the Iran war. Now, markets see a greater chance that the Fed will raise rates once more by year-end rather than cut. The FedWatch tool, which derives probabilities from 30-day federal funds futures prices, reflected a 68.4% chance as of the December FOMC that the Fed will raise rates.