Middle East tensions reignite inflation concerns, multiple countries' monetary policies face new test

◎ Reporter Chen Jiayi

As tensions in the Middle East escalate, the “Super Central Bank Week” arrives as scheduled. As of 3:00 AM Beijing time on March 19, central banks including the Reserve Bank of Australia, Bank of Canada, Federal Reserve, Banco Central do Brasil, Bank of Japan, Bank of England, and European Central Bank have announced their latest interest rate decisions.

From the results, it is clear that global monetary policies are diverging: most central banks have kept rates steady, while some have raised or cut rates. This pattern reflects each country’s assessment based on their economic conditions and inflation pressures, as well as cautiousness amid geopolitical uncertainties.

For many central banks, the inflation shocks from the Ukraine crisis four years ago are still fresh. At that time, under the mistaken belief that inflation was temporary, many underestimated the severity of inflation, paying a heavy price for aggressive tightening. Now, a similar situation is unfolding again, with global central banks tightening their nerves amid rising inflation risks.

Divergence in Monetary Policy Decisions During “Super Central Bank Week”

“Super Central Bank Week” refers to a period when multiple major economies’ central banks announce interest rate decisions within a week, serving as an important window to observe global monetary policy trends.

This round of decisions is particularly noteworthy due to the current special circumstances. For some time, escalating tensions in the Middle East have driven energy prices higher, fueling concerns about a global inflation rebound, prompting central banks worldwide to urgently reassess their policy outlooks.

For these central banks, the current situation is a dilemma: on one hand, inflation resurgence may force tightening; on the other, geopolitical uncertainties could hinder economic growth, requiring rate cuts to support the economy. ICBC International Chief Economist Cheng Shi analyzed that geopolitical conflicts could not only push up actual inflation through rising energy and commodity prices but also dampen consumption and investment expectations by disrupting household sentiment, increasing economic volatility.

Looking at the recent interest rate decisions, divergence is evident. On March 17, the Reserve Bank of Australia took the lead, raising rates by 25 basis points to 4.10%, marking its second consecutive rate hike this year.

The core reason for this hike is concern over inflation. The RBA stated in its announcement that inflation remains above the target range and faces upside risks, especially with fuel prices rising significantly due to Middle East tensions. If this trend continues, inflation could be further pushed up.

Other central banks have adopted a cautious stance. In the early hours of March 19, the Federal Reserve announced it would keep the federal funds rate unchanged at 3.5%–3.75%. Similarly, the Bank of Canada, European Central Bank, Bank of England, and Bank of Japan also chose to hold rates steady.

Brazil’s central bank, however, decided to cut rates by 25 basis points. It noted that overall inflation and core indicators continue to cool but remain above target. Risks to inflation—both upside and downside—were already high before the Middle East conflict, and the outbreak of hostilities has further increased these risks. Maintaining restrictive rates for a long time has begun to slow economic growth.

“Central banks’ monetary policies are aimed at balancing inflation pressures with supporting economic growth. Their actions reflect which aspect they prioritize at the moment,” said Wang Xinjie, Chief Investment Strategist at Standard Chartered China Wealth Solutions.

Middle East Tensions Remain Key to Future Policy Path

Signals from various central banks indicate that the evolving situation in the Middle East and its impact on inflation transmission remain crucial in determining future monetary policy directions.

In their statements, many central banks mentioned the influence of Middle East tensions. For example, the Federal Reserve noted that “the impact of developments in the Middle East on the U.S. economy remains uncertain.” Bai Xue, Senior Deputy Director of Research and Development at Dongxing Securities, said that including geopolitical risks in policy statements shows that such risks have shifted from peripheral variables to a core constraint on policy.

Looking ahead, analysts believe that until the duration of the conflict and the pathways of price transmission become clearer, central banks will remain cautious.

The latest Fed “dot plot” indicates that Fed officials still expect to cut rates once in the next two years, but more members are shifting toward fewer rate cuts. Cheng Shi believes that in the short term, the Fed is likely to maintain a cautious stance to stabilize inflation expectations. The future path of monetary policy will depend on energy prices and geopolitical risk developments. If external shocks ease, policy could gradually return to a path of gradual rate cuts.

Additionally, rising inflation risks may force some central banks to end easing cycles or even start rate hikes. Fed Chair Jerome Powell mentioned that discussions about “possible rate hikes” have been raised. Under inflation fears, expectations of rate increases are also brewing among the European Central Bank, Bank of England, and others.

Ding Meng, Chief Economist at CITIC Bank International, stated that Middle East tensions have led more central banks to adopt a wait-and-see approach and have increased the likelihood of future rate hikes. If the conflict prolongs, the risk of rising inflation could prompt more central banks to raise rates to curb inflation. Due to differing economic and inflation outlooks, monetary policies will also diverge.