Central Banks Hold Rates Amid War, Inflation, and Strait of Hormuz Concerns
Major central banks, including the ECB and US Federal Reserve, are expected to hold interest rates this week amid the ongoing war and elevated inflation risks. Policymakers are assessing energy-driven inflation, with the ECB warning of potential 4.4% inflation in a severe scenario. The IMF lowered eurozone growth forecasts and cautioned about the Strait of Hormuz's impact on inflation expectations.
As the war, now in its third month, continues with an open-ended ceasefire between the US and Iran, major central banks are expected to maintain current interest rates this week. The European Central Bank (ECB), US Federal Reserve, Bank of Japan, Bank of Canada, and Bank of England will convene under the shadow of war and the second significant energy price shock in five years.
Policymakers are adopting a wait-and-see approach to assess if energy-driven inflation will persist. The ECB warned last month that headline inflation across the bloc could reach 4.4 per cent in a severe scenario where energy prices remain high. However, ECB chief Christine Lagarde stated this severe scenario has not yet materialized.
The International Monetary Fund (IMF) lowered its eurozone growth forecast to 1.1 per cent, citing the war. The IMF also cautioned that inflation expectations could become unmoored if the Strait of Hormuz remains closed to shipping. Deutsche Bank noted that with G7 central bank meetings and 44 per cent of the S&P500 reporting this week, it will be a significant period, with interest rates expected to remain on hold, but central banks' reactions will be shaped by the conflict and stagflation risks.