The second wave of energy shocks within five years is imminent, with the world's five major central banks expected to remain on hold this week. Trump's social media posts continue to stir the oil market, while conflicts in the Middle East make inflation trends difficult to predict. The Federal Reserve remains vigilant against the risk of high inflation becoming "entrenched" in the economy, whereas the European Central Bank feels more comfortable adopting a wait-and-see stance. Expectations for interest rate hikes by the Bank of Japan and the Bank of England have abruptly cooled. The painful lesson from misjudging inflation in 2022 is still fresh in the minds of central banks, leading them to prefer staying cautious rather than making hasty moves amid uncertainty.
The world's monetary policy decisions are being overshadowed by the second major energy price shock in five years, with key central banks set to hold interest rate meetings this week but expected to remain on hold.
Trump's frequent posts on social media continue to roil energy markets, making it difficult for policymakers to make reliable forecasts about inflation trends. The Federal Reserve, European Central Bank, Bank of Japan, Bank of Canada, and Bank of England will all announce interest rate decisions this week, against a backdrop of geopolitical risks stemming from the Middle East conflict and sharp volatility in commodity markets.
According to the Financial Times, Tomasz Wieladek, Chief European Macro Strategist at T Rowe Price, stated, "Given the uncertainty surrounding the situation in the Gulf and how the energy shock will transmit to growth and inflation, the correct approach for central banks now is to wait and see." Market expectations for rate hikes by central banks this week are extremely low, but inflation risks are building.
The biggest shadow over this meeting comes from the historical lesson of the significant inflation surge between 2021 and 2022—when multiple central banks were heavily criticized for acting too slowly. Policymakers are acutely aware that another misjudgment could come at a heavy cost.
Trump's Posts Reshape Oil Market Logic
A notable feature of the current turbulence in energy markets is the direct impact of Trump's social media posts on oil prices. Sebastian Barrack, Head of Commodities at hedge fund Citadel, said last week at a Financial Times conference in Switzerland that Trump's social media activity during the Iran conflict has fundamentally altered the functioning of the oil market. Traders often struggle to cope with the extreme volatility triggered by his frequent posts and responses from the Iranian regime.
In the face of this highly uncertain environment, central banks have adjusted their decision-making frameworks—shifting away from reliance on a single central forecast and placing greater emphasis on scenario analysis, incorporating various potential outcomes of the Middle East conflict.
Jens Larsen, a former Bank of England official now at Eurasia Group, noted, "This presents a significant challenge for a central banker accustomed to thinking about marginal pricing and labor market dynamics."
European Central Bank: The Most Confident Observer
Among major Western central banks, the European Central Bank is considered to be in a relatively favorable position. Katharine Neiss, Chief European Economist at PGIM Fixed Income, stated that the ECB is "the only central bank that has truly brought inflation back to its 2% target," giving it more room to maneuver in policy decisions.
Financial markets are currently pricing in two interest rate hikes by the European Central Bank (ECB) this year from the current level of 2%, but ECB Chief Economist Philip Lane made it clear last week that the institution is in no rush to make a judgment. "It is difficult to determine whether this is a temporary phase or a greater shock to the European economy until we have a clearer understanding of how long this war will last," he said during a panel discussion in Frankfurt.
Morgan Stanley economist Jens Eisenschmidt believes that the earliest time for the ECB to "properly assess whether action is needed" would be "no earlier than June, and possibly even later."
Federal Reserve: Inflation Risk Alert Sounded
The Federal Reserve is set to vote on Wednesday to maintain the benchmark interest rate within the range of 3.5% to 3.75%, which is almost a foregone conclusion. The Fed has put any rate cuts on hold as it awaits officials' clearer assessment of whether the war with Iran will hinder its goal of achieving 2% inflation or further damage an already weakened U.S. job market. The annual inflation rate for personal consumption expenditures (PCE) in February remained at 2.8%, still above target.
However, some officials have begun issuing warnings about inflation risks. Federal Reserve Governor Chris Waller warned this month that a series of price shocks—not only from the war but also from Trump's trade policies—are threatening to erode public trust in the Fed’s ability to control inflation. Waller noted that the longer energy prices remain elevated, the greater the likelihood that high inflation will become "entrenched" in the U.S. economy, with households and businesses beginning to price in stronger inflationary pressures as a permanent phenomenon.
Joe Lavorgna, Chief Economist for the Americas at Sumitomo Mitsui Banking Corporation and former advisor to the U.S. Treasury Secretary, stated, "We are entering another supply shock of uncertain duration, while U.S. inflation remains well above target."
Bank of Japan and Bank of England: Expectations for Rate Hikes Abruptly Cool
Expectations for a policy shift by the Bank of Japan have also reversed. Investors had previously anticipated that the Bank of Japan would raise its benchmark interest rate from around 0.75% this week, but the market now assigns an extremely low probability to such a move. Uncertainty stemming from the Iran conflict, coupled with Japan's particular vulnerability as a heavy importer of energy and industrial raw materials, has made the timing of a rate hike increasingly difficult to gauge.
Recent remarks by Bank of Japan Governor Kazuo Ueda contained no hints of a rate hike in April, and officials have signaled that the central bank no longer seeks to act unexpectedly. UBS Group economist Go Kurihara expects Tuesday’s decision by the Bank of Japan to be accompanied by a significant upward revision of inflation forecasts and a downward revision of economic outlook.
The same holds true for the Bank of England. While the bank seemed to hint at a possible rate hike from 3.75% in March, traders’ bets on such a move have now dropped significantly following signals from Governor Bailey that investors were overreacting.
Wieladek summarized the shared mindset of central banks: "They want to know whether we are heading toward a situation like that of 2022, where inflation surged far beyond expectations. But with just one month's data, they simply cannot make a judgment."
Editor/Joe