Major developed market central banks largely held interest rates steady this week but stressed their vigilance regarding inflation. The focus is on mitigating potential inflationary pressures stemming from the energy shock caused by the U.S.-Israeli war on Iran. This conflict has already led traders to reduce expectations for monetary easing by the Federal Reserve and to anticipate rate increases by other central banks, including the European Central Bank and the Bank of England.
The Reserve Bank of Australia (RBA), which manages monetary policy and issues currency, continued its hiking cycle, raising rates for the second consecutive month to 4.1%. The RBA cited a ‘material’ inflation risk from the war, with core inflation hitting a 16-month high of 3.4% in January. Market expectations suggest at least two or possibly three more rate hikes this year, potentially pushing rates above their late 2023 peak.
Elsewhere, the Bank of England held rates at 3.75%, but its statement was perceived as hawkish, increasing the likelihood of rate hikes later in the year. Similarly, the Bank of Canada maintained its rate at 2.25% but cautioned it’s prepared to raise rates if energy prices trigger persistent inflation. The European Central Bank also left rates unchanged, closely monitoring the inflationary impact of surging energy prices. The Swiss National Bank, with the lowest policy rate at 0%, stands ready to intervene to curb the Swiss franc’s appreciation amid low inflation.
