Global Central Banks' Super Week Concludes! Inflation Alarm Sounds, Is a Rate Hike Wave Coming?

Is Stagflation Coming Soon?

This week marked the end of the global central bank super week, with meetings held simultaneously by the Federal Reserve, Bank of Japan, Bank of England, Bank of Canada, and several emerging economies. Ongoing conflicts in the Middle East continue to disrupt energy supplies, causing price shocks that are affecting various industries and may suppress economic growth while pushing inflation higher. Policymakers worldwide are closely monitoring the situation, wary of the risk that this prolonged conflict could overturn the global economy.

Central Banks on High Alert

According to a summary by First Financial, in response to the surge in oil prices caused by escalating Middle East tensions, central banks in the affected economies have clearly stated they are on alert. They are concerned that rising energy prices could lead households to demand wage increases, potentially triggering a new wave of inflation across the economy.

The Federal Reserve decided to keep interest rates steady at 3.50%–3.75%, with a vote of 11 in favor and 1 against, while revising inflation expectations upward. Fed Chair Jerome Powell stated at the press conference, “In the short term, rising energy prices will push up overall inflation, but it’s too early to judge the scope and duration of their potential impact on the economy.” Powell did not see a weaker labor market as more threatening to the Fed’s policy goals than inflation, which has delayed market expectations for rate cuts until 2027 and increased the probability of a rate hike at the next meeting to 12%.

The European Central Bank (ECB) maintained interest rates at the March meeting but signaled readiness to raise rates if high energy prices push inflation higher. The ECB’s statement noted that soaring energy prices have led to an upward revision of the eurozone’s 2026 inflation forecast to 2.6%, well above the 2% target.

ECB President Christine Lagarde said that energy costs will have a “substantial impact” on inflation, adding, “The Middle East conflict has significantly increased economic uncertainty, posing upside risks to inflation while also threatening economic growth.” Data from the London Stock Exchange Group shows that the eurozone money markets are fully pricing in a rate hike in June. J.P. Morgan expects the ECB to raise rates twice—once in April and again in July.

Bank of England Governor Andrew Bailey, after the Monetary Policy Committee unanimously voted to keep rates unchanged, stated, “Monetary policy cannot reverse shocks to the supply side, such as energy.” He added, “However, it must respond to the risk of more persistent inflation in the UK Consumer Price Index.” Following the decision, the UK 10-year government bond yield hit a new high since 2008, and the markets are pricing in three rate hikes this year.

As the first economy to enter a tightening cycle, Japan’s central bank governor Haruhiko Kuroda indicated that if the surge in oil prices proves to be temporary and does not hinder Japan’s ongoing inflation target achievement, there is a possibility of short-term rate hikes. “It’s important to note that companies are actively raising wages and prices amid the current situation, which could mean they are passing on costs more aggressively than after the Russia-Ukraine conflict,” he said.

In Australia, the Reserve Bank of Australia (RBA) raised interest rates for the second consecutive time, pushing the cash rate to a 10-month high and warning that rising oil prices pose a “material” inflation risk.

The Bank of Canada kept rates steady, but Governor Tiff Macklem expressed similar concerns: “If energy prices remain high, we will not allow their impact to spill over into persistent inflation.”

Emerging Economies

Indonesia’s central bank kept its 7-day reverse repurchase rate at 4.75%, a hawkish hold seen as a signal that the current easing cycle has ended. Bank Indonesia Governor Perry Warjiyo stated that the primary goal is to stabilize the rupiah amid Iran-related conflicts and ensure inflation remains within target ranges.

Brazil’s central bank, despite having among the highest interest rates among major economies, cautiously cut rates by 25 basis points to 14.75%, a smaller cut than market expectations.

Rising Risks of Stagflation?

After inflation surged following the COVID-19 pandemic in 2022, compounded by the intensification of the Russia-Ukraine conflict, central banks faced criticism for acting too late. Now, policymakers face the challenge of controlling prices without further weakening already uneven economic growth, to avoid a stagflation scenario—an unfavorable combination of high inflation and sluggish growth.

Stagflation is a harmful mix of high inflation and weak economic growth, which compresses corporate profits, causes declines in stocks and bonds, and limits monetary policy options.

Worrying trading patterns have emerged in the approximately $30 trillion US Treasury market, indicating increased concern about the economy and inflation. The two-year Treasury yield has led gains, while the 10-year yield has lagged, creating a bear-flattening curve. This pattern, where short-term yields rise faster than long-term yields, often signals tighter Fed policy and a higher risk of economic slowdown or recession. As of Friday’s close, the spread between 2-year and 10-year yields narrowed from 74 basis points in early February to around 50 basis points.

The ongoing conflict escalated again this week—Iran launched attacks damaging Qatar’s largest natural gas processing plant and targeting other energy facilities in the Gulf as retaliation for Israel’s attacks on Iranian gas infrastructure.

Charles Chanana, Chief Investment Strategist at Saxo Bank Singapore, said, “This escalation marks a turning point for markets because it’s no longer just military news or the Strait of Hormuz blockade. It’s impacting the core of the global energy system. What’s unsettling markets now is the rising risk of stagflation.”

In contrast, Tom Hainlin, Investment Strategist at U.S. Bancorp Asset Management, believes concerns about stagflation are premature. “The Middle East situation could still evolve rapidly and reverse course. Right now, it’s more like a typical energy shock,” he explained. “Before high oil prices feed into inflation expectations, we don’t see this as a stagflation environment.”

Gary Slozbarg, Global Strategist at Wells Fargo Investment Institute, said, “The flattening yield curve clearly reflects market caution regarding Fed policy prospects and intensifies stagflation fears. However, we believe this won’t resemble the stagflation of the 1970s. The risks of high inflation and economic weakness are indeed rising, but we expect this combination to be temporary.”