As we enter the heart of summer, central banks appear to be settling into a cautious holding pattern, more reactive than directive, amid mounting global uncertainty. From renewed trade tensions under President Trump to escalating conflict in the Middle East, policymakers are treading carefully, mindful that today’s risks are more geopolitical than economic in origin. The era of aggressive monetary tightening to combat inflation has clearly passed, replaced by a wait-and-see approach that prioritises stability over bold moves. In this update, our Chief Investment Officer, Jeff Brummette, examines the latest central bank decisions and highlights why growth concerns, not inflation, are increasingly guiding the hands of global monetary authorities as we move into Quarter 3.
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Major central banks worldwide are, like the rest of us, closely watching developments on President Trump’s trade policies and the evolving conflict in the Middle East. This has become even more uncertain with the direct involvement of the United States of America in the Israel-Iran conflict. Unlike the proactive stance they took in 2022-2024, when they were aggressively tightening policy to fight inflation, central banks are not poised to respond to developments rather than set the agenda.
The U.S. Federal Reserve Open Market Committee and the Bank of England‘s Monetary Policy Committee both held meetings last week where they left policy interest rates unchanged. Earlier in the month, the European Central Bank’s Governing Council cut rates by 25 basis points to 2.0%, but suggested that this was likely their last cut in the current cycle. The next meetings for these policymakers are scheduled for late July or early August.
Central Bank Policy Rates
Source: Bloomberg Finance L.P.
The European Central Bank has been the most effective in bringing inflation back to target, which has allowed them to be more aggressive in lowering interest rates from 4.0% down to 2.0%. The Federal Reserve and the Bank of England have faced greater challenges, as inflation remains above their 2.0% targets.
Headline Inflation – CPI
Source: Bloomberg Finance L.P.
At their post meeting press conferences, all three central banks stressed their uncertainty about the future path of inflation, largely due to tariff risks.
The Federal Reserve has been on hold so far this year as it evaluates the impact of tariffs on the U.S. economy. Chairman Jerome Powell acknowledged the unprecedented nature of the situation, stating “We haven’t been through a situation like this, and I think we have to be humble about our ability to forecast it”. On the timing of potential cuts, Powell remarked that these “could come quickly” then countered that “it could not come quickly”, Powell also said. “We feel like we’re going to learn a great deal more over the summer on tariffs.”
The Bank of England has implemented two 25 basis point reductions this year. However, with inflation having jumped back above 3.0%, the Monetary Policy Committee continue to emphasise the need to move slowly. In their statement, they noted, “There remain two-sided risks to inflation. Given the outlook, and continued disinflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. Monetary policy is not on a pre-set path.”
We believe the central banks are now more sensitive to growth risks than to inflation risks. If the global economy were to slow significantly, they would likely respond with rate cuts. Currently, their stance leans toward either holding rates steady or cutting them.
They are likely to disregard any inflation caused by an oil price spike resulting from events in the Middle East, interpreting it as a factor that suppresses growth and economic activity rather than as a driver of sustained inflation. Instead, their primary concern is with tariffs, which could become a more persistent and troubling source of upward inflationary pressures.
Central banks, like the rest of us, lack any special insight into trade or geopolitical developments. Consequently, markets are likely to react ahead of their policy adjustments.
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Hear more from the Oakglen experts
Our investment team continue to provide interesting and informative content to help keep you in the loop on recent global news and market trends. See below for some key highlights from around the world which our Chief Investment Officer, Jeff Brummette, has recently covered:
Read more:
- Middle East Tensions Escalate: Market and Oil Price Impacts
William Lamond, Investment Director (Jersey)
- June 2025 Investment Summary
Jeff Brummette, Chief Investment Officer
- Trump 2.0 The First 100 Days – The Art of the Retreat?
Jeff Brummette, Chief Investment Officer
You can read other articles from the team on our News & Insights page.
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