Major developed market central banks largely maintained their current interest rates this week but signalled readiness to act against potential inflationary pressures. The concerns stem from the energy shocks resulting from recent geopolitical events. Since the beginning of the conflict, traders have adjusted their expectations, reducing bets on monetary easing by the Federal Reserve and anticipating rate increases from the European Central Bank and the Bank of England. The Reserve Bank of Australia, already in a tightening cycle, raised rates again this week.
The Reserve Bank of Australia (RBA) is the central bank of Australia. It conducts monetary policy and issues currency. This week, the RBA increased rates for the second consecutive month, bringing the rate to 4.1%, citing “material” inflation risks linked to the war. Markets anticipate at least two, and possibly three, further rate hikes this year, potentially exceeding the highs of late 2023. Elsewhere, the Bank of England held rates steady at 3.75%, but the post-meeting statement was perceived as hawkish, increasing the likelihood of a rate hike by April and potentially three by the end of the year.
The Federal Reserve maintained rates in the 3.50%-3.75% range, but Chairman Jerome Powell’s commentary led traders to delay expectations of rate cuts to 2027. While projecting one cut in 2026, the Fed also forecast higher inflation for the current year. Other central banks, including the Bank of Canada, kept rates unchanged but cautioned that they were prepared to raise borrowing costs should rising energy prices lead to persistent inflation. The European Central Bank also held rates steady but sources suggest discussions about rate hikes may begin soon, with markets pricing in multiple rate hikes this year.
